Business Ethics

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

Margaret A. Peteraf Dartmouth College

Arthur A. Thompson, Jr. The University of Alabama

ESSENTIALS OF

STRATEGIC MANAGEMENT The Quest for Competitive Advantage

Final PDF to printer

gam27636_fm_i-xxxvi.indd ii 01/16/18 09:52 PM

ESSENTIALS OF STRATEGIC MANAGEMENT: THE QUEST FOR COMPETITIVE ADVANTAGE, SIXTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2019 by McGraw- Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2017, 2015, and 2013. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 0 LWI 21 20 19 18

ISBN 978-1-259-92763-8 (bound edition) MHID 1-259-92763-6 (bound edition) ISBN 978-1-260-13956-3 (loose-leaf edition) MHID 1-260-13956-5 (loose-leaf edition)

Portfolio Director: Michael Ablassmeir Lead Product Developer: Kelly Delso Product Developer: Anne Ehrenworth Executive Marketing Manager: Debbie Clare Content Project Managers: Harvey Yep (Core), Keri Johnson (Assessment) Buyer: Laura Fuller Design: Matt Diamond Content Licensing Specialists: DeAnna Dausener (Image and Text) Compositor: SPi Global Cover Image: ©view stock/getty images Printer: LSC Communications

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Cataloging-in-Publication Data

Names: Gamble, John (John E.) author. | Thompson, Arthur A., 1940- author. | Peteraf, Margaret Ann, author. Title: Essentials of strategic management: the quest for competitive advantage/ John E. Gamble, Texas A&M University-Corpus Christi, Margaret A. Peteraf, Dartmouth College, Arthur A. Thompson, Jr., The University of Alabama. Description: Sixth Edition. | Dubuque : McGraw-Hill Education, 2019. | Revised edition of the authors’ Essentials of strategic management, [2017] Identifiers: LCCN 2017059878 | ISBN 9781259927638 (paperback) Subjects: LCSH: Strategic planning. | Business planning. | Competition. | Strategic planning–Case studies. | BISAC: BUSINESS & ECONOMICS / Management. Classification: LCC HD30.28 .G353 2018 | DDC 658.4/012–dc23 LC record available at https://lccn.loc.gov/2017059878

mheducation.com/highfered

Final PDF to printer

gam27636_fm_i-xxxvi.indd iii 01/16/18 09:52 PM

iii

John E. Gamble is a Professor of Management and Dean of the College of Business at Texas A&M University–Corpus Christi. His teaching and research has focused on stra- tegic management at the undergraduate and graduate levels. He has conducted courses in strategic management in Germany since 2001, which have been sponsored by the University of Applied Sciences in Worms.

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

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

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

Professor Peteraf earned her PhD, MA, and MPhil at Yale University and held previ- ous faculty appointments at Northwestern University’s Kellogg Graduate School of Management and at the University of Minnesota’s Carlson School of Management.

ABOUT THE AUTHORS

John E. Gamble ©Richard’s Photography LLC

Margaret A. Peteraf ©Heather Gere

Final PDF to printer

gam27636_fm_i-xxxvi.indd iv 01/16/18 09:52 PM

iv About the Authors

Arthur A. Thompson, Jr. earned his BS and PhD degrees in economics from The University of Tennessee, spent three years on the economics faculty at Virginia Tech, and served on the faculty of The University of Alabama’s College of Commerce and Business Administration for 25 years. In 1974 and again in 1982, Dr. Thompson spent semester-long sabbaticals as a visiting scholar at the Harvard Business School.

His areas of specialization are business strategy, competition and market analysis, and the economics of business enterprises. In addition to publishing over 30 articles in some 25 different professional and trade publications, he has authored or co-authored five textbooks and six computer-based simulation exercises that are used in colleges and universities worldwide.

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

Dr. Thompson and his wife of 57 years have two daughters, two grandchildren, and a Yorkshire terrier.

Arthur A. Thompson, Jr. Photo provided by the author.

Final PDF to printer

gam27636_fm_i-xxxvi.indd v 01/16/18 09:52 PM

v

BRIEF CONTENTS PART ONE CONCEPTS AND TECHNIQUES FOR CRAFTING AND EXECUTING STRATEGY

Section A: Introduction and Overview

1. Strategy, Business Models, and Competitive Advantage 1

2. Strategy Formulation, Execution, and Governance 13

Section B: Core Concepts and Analytical Tools

3. Evaluating a Company’s External Environment 36 4. Evaluating a Company’s Resources, Capabilities,

and Competitiveness 64

Section C: Crafting a Strategy

5. The Five Generic Competitive Strategies 88 6. Strengthening a Company’s Competitive Position:

Strategic Moves, Timing, and Scope of Operations 111

7. Strategies for Competing in International Markets 132

8. Corporate Strategy: Diversification and the Multibusiness Company 154

9. Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy 182

Section D: Executing the Strategy

10. Superior Strategy Execution—Another Path to Competitive Advantage 199

Appendix Key Financial Ratios: How to Calculate Them and What They Mean 231

PART TWO CASES IN CRAFTING AND EXECUTING STRATEGY

Case 1 Airbnb, Inc., in 2017 233 Case 2 Costco Wholesale in 2017: Mission, Business

Model, and Strategy 238

Case 3 Competition in the Craft Brewing Industry in 2017 261

Case 4 Fitbit, Inc., in 2017: Can It Revive Its Strategy and Reverse Mounting Losses? 271

Case 5 lululemon athletica, inc., in 2017: Is the Company on the Path to Becoming a High Performer Once Again? 279

Case 6 Gap Inc.: Can It Develop a Strategy to Connect with Consumers in 2017? 298

Case 7 GoPro in 2017: Will Its Turnaround Strategy Restore Profitability? 307

Case 8 Ricoh Canada 322 Case 9 Mondelēz International’s Diversification

Strategy in 2017: Has Corporate Restructuring Benefited Shareholders? 335

Case 10 Robin Hood 346 Case 11 Rosen Hotels & Resorts 348 Case 12 TOMS Shoes in 2016: An Ongoing Dedication

to Social Responsibility 360

Glossary 369

Indexes 373

Final PDF to printer

gam27636_fm_i-xxxvi.indd vi 01/16/18 09:52 PM

vi

PREFACE

The standout features of this sixth edition of Essentials of Strategic Management are its concisely written and robust coverage of strategic management concepts and its compelling collection of cases. The text presents a conceptually strong treatment of strategic management principles and analytic approaches that features straight-to- the-point discussions, timely examples, and a writing style that captures the interest of students. While this edition retains the 10-chapter structure of the prior edition, every chapter has been reexamined, refined, and refreshed. New content has been added to keep the material in line with the latest developments in the theory and practice of strategic management. Also, scores of new examples have been added, along with fresh Concepts & Connections illustrations, to make the content come alive and to provide students with a ringside view of strategy in action. The fundamental character of the sixth edition of Essentials of Strategic Management is very much in step with the best academic thinking and contemporary management practice. The chapter content con- tinues to be solidly mainstream and balanced, mirroring both the penetrating insight of academic thought and the pragmatism of real-world strategic management.

Complementing the text presentation is a truly appealing lineup of 12 diverse, timely, and thoughtfully crafted cases. All of the cases are tightly linked to the content of the 10 chapters, thus pushing students to apply the concepts and analytical tools they have read about. Seven of the cases were written by the coauthors to illustrate spe- cific tools of analysis or distinct strategic management theories. Cases not written by the coauthors were included because of their exceptional pedagogical value and link- age to strategic management concepts presented in the text. We are confident you will be impressed with how well each of the 12 cases in the collection will work in the class- room and the amount of student interest they will spark.

For some years now, growing numbers of strategy instructors at business schools world- wide have been transitioning from a purely text-cases course structure to a more robust and energizing text-cases-simulation course structure. Incorporating a competition-based strategy simulation has the strong appeal of providing class members with an immediate and engaging opportunity to apply the concepts and analytical tools covered in the chapters in a head-to-head competition with companies run by other class members. Two widely used and pedagogically effective online strategy simulations, The Business Strategy Game and GLO-BUS, are optional companions for this text. Both simulations, like the cases, are closely linked to the content of each chapter in the text. The Exercises for Simulation Participants, found at the end of each chapter, provide clear guidance to class members in applying the concepts and analytical tools covered in the chapters to the issues and deci- sions that they have to wrestle with in managing their simulation company.

Through our experiences as business school faculty members, we also fully under- stand the assessment demands on faculty teaching strategic management and business

Final PDF to printer

gam27636_fm_i-xxxvi.indd vii 01/16/18 09:52 PM

Preface vii

policy courses. In many institutions, capstone courses have emerged as the logical home for assessing student achievement of program learning objectives. The sixth edition includes Assurance of Learning Exercises at the end of each chapter that link to the specific Learning Objectives appearing at the beginning of each chapter and highlighted throughout the text. An important instructional feature of this edition is the linkage of selected chapter-end Assurance of Learning Exercises and cases to the publisher’s Connect® web-based assignment and assessment platform. Your students will be able to use the online Connect supplement to (1) complete two of the Assurance of Learning Exercises appearing at the end of each of the 10 chapters, (2) complete chapter-end quizzes, and (3) complete case tutorials based upon the suggested assignment questions for all 12 cases in this edition. With the exception of some of the chapter-end Assurance of Learning exercises, all of the Connect exercises are automatically graded, thereby enabling you to easily assess the learning that has occurred.

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

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

Differentiation from Other Texts Five noteworthy traits strongly differentiate this text and the accompanying instructional package from others in the field:

1. Our integrated coverage of the two most popular perspectives on strategic management positioning theory and resource-based theory is unsurpassed by any other leading strategy text. Principles and concepts from both the positioning perspective and the resource-based perspective are prominently and comprehensively integrated into our coverage of crafting both single-business and multibusiness strategies. By highlighting the relationship between a firm’s resources and capabilities to the activities it conducts along its value chain, we show explicitly how these two perspectives relate to one another. Moreover, in Chapters 3 through 8, it is emphasized repeatedly that a company’s strategy must be matched not only to its external market circumstances but also to its internal resources and competitive capabilities.

Final PDF to printer

gam27636_fm_i-xxxvi.indd viii 01/16/18 09:52 PM

viii Preface

2. Our coverage of business ethics, core values, social responsibility, and environmental sustainability is unsurpassed by any other leading strategy text. Chapter 9, “Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy,” is embellished with fresh content so that it can better fulfill the important functions of (1) alerting students to the role and importance of ethical and socially responsible decision making and (2) addressing the accreditation requirements that business ethics be visibly and thoroughly embedded in the core curriculum. Moreover, discussions of the roles of values and ethics are integrated into portions of other chapters to further reinforce why and how considerations relating to ethics, values, social responsibility, and sustainability should figure prominently into the manage- rial task of crafting and executing company strategies.

3. The caliber of the case collection in the sixth edition is truly unrivaled from the stand- points of student appeal, teachability, and suitability for drilling students in the use of the concepts and analytical treatments in Chapters 1 through 10. The 12 cases included in this edition are the very latest, the best, and the most on-target that we could find. The ample information about the cases in the Instructor’s Manual makes it effortless to select a set of cases each term that will capture the interest of students from start to finish.

4. The publisher’s Connect assignment and assessment platform is tightly linked to the text chapters and case lineup. The Connect package for the sixth edition allows pro- fessors to assign autograded quizzes and select chapter-end Assurance of Learning Exercises to assess class members’ understanding of chapter concepts. In addition, our texts have pioneered the extension of the Connect platform to case analysis. The autograded case exercises for each of the 12 cases in this edition are robust and extensive and will better enable students to make meaningful contributions to class discussions. The autograded Connect case exercises may also be used as graded assignments in the course.

5. The two cutting-edge and widely used strategy simulations—The Business Strategy Game and GLO-BUS—that are optional companions to the sixth edition give you unmatched capability to employ a text-case-simulation model of course delivery.

Organization, Content, and Features of the Sixth Edition Text Chapters The following rundown summarizes the noteworthy features and topical emphasis in this new edition:

• Chapter 1 serves as an introduction to the topic of strategy, focusing on the manage- rial actions that will determine why a company matters in the marketplace. We intro- duce students to the primary approaches to building competitive advantage and the key elements of business-level strategy. Following Henry Mintzberg’s pioneer- ing research, we also stress why a company’s strategy is partly planned and partly reactive and why this strategy tends to evolve. The chapter also discusses why it is important for a company to have a viable business model that outlines the com- pany’s customer value proposition and its profit formula. This brief chapter is the

Final PDF to printer

gam27636_fm_i-xxxvi.indd ix 01/16/18 09:52 PM

Preface ix

perfect accompaniment to your opening-day lecture on what the course is all about and why it matters.

• Chapter 2 delves more deeply into the managerial process of actually crafting and executing a strategy. It makes a great assignment for the second day of class and pro- vides a smooth transition into the heart of the course. The focal point of the chapter is the five-stage managerial process of crafting and executing strategy: (1) forming a strategic vision of where the company is headed and why, (2) developing strategic as well as financial objectives with which to measure the company’s progress, (3) crafting a strategy to achieve these targets and move the company toward its market destination, (4) implementing and executing the strategy, and (5) evaluating a company’s situation and performance to identify corrective adjustments that are needed. Students are introduced to such core concepts as strategic visions, mission statements and core values, the balanced scorecard, and business-level versus corporate-level strategies. There’s a robust discussion of why all managers are on a company’s strategy-making, strategy-executing team and why a company’s strategic plan is a collection of strategies devised by different managers at different levels in the organizational hierarchy. The chapter winds up with a section on how to exercise good corporate governance and examines the conditions that led to recent high-profile corporate governance failures.

• Chapter 3 sets forth the now-familiar analytical tools and concepts of industry and competitive analysis and demonstrates the importance of tailoring strategy to fit the circumstances of a company’s industry and competitive environment. The standout feature of this chapter is a presentation of Michael Porter’s “five forces model of com- petition” that has long been the clearest, most straightforward discussion of any text in the field. Chapter revisions include an improved discussion of the macro-environment, focusing on the use of the PESTEL analysis framework for assessing the political, economic, social, technological, environmental, and legal factors in a company’s macro-environment. New to this edition is a discussion of Michael Porter’s Frame- work for Competitor Analysis used for assessing a rival’s likely strategic moves.

• Chapter 4 presents the resource-based view of the firm, showing why resource and capability analysis is such a powerful tool for sizing up a company’s competi- tive assets. It offers a simple framework for identifying a company’s resources and capabilities and explains how the VRIN framework can be used to determine whether they can provide the company with a sustainable competitive advantage over its competitors. Other topics covered in this chapter include dynamic capa- bilities, SWOT analysis, value chain analysis, benchmarking, and competitive strength assessments, thus enabling a solid appraisal of a company’s relative cost position and customer value proposition vis-à-vis its rivals.

• Chapter 5 deals with the basic approaches used to compete successfully and gain a competitive advantage over market rivals. This discussion is framed around the five generic competitive strategies—low-cost leadership, differentiation, best-cost provider, focused differentiation, and focused low-cost. It describes when each of these approaches works best and what pitfalls to avoid. It explains the role of cost drivers and uniqueness drivers in reducing a company’s costs and enhancing its differentiation, respectively.

Final PDF to printer

gam27636_fm_i-xxxvi.indd x 01/16/18 09:52 PM

x Preface

• Chapter 6 deals with the strategy options available to complement a company’s competitive approach and maximize the power of its overall strategy. These include a variety of offensive or defensive competitive moves, and their timing, such as blue ocean strategy and first-mover advantages and disadvantages. It also includes choices concerning the breadth of a company’s activities (or its scope of operations along an industry’s entire value chain), ranging from horizontal merg- ers and acquisitions, to vertical integration, outsourcing, and strategic alliances. This material serves to segue into that covered in the next two chapters on interna- tional and diversification strategies.

• Chapter 7 explores the full range of strategy options for competing in international markets: export strategies, licensing, franchising, establishing a subsidiary in a for- eign market, and using strategic alliances and joint ventures to build competitive strength in foreign markets. There is also a discussion of how to best tailor a com- pany’s international strategy to cross-country differences in market conditions and buyer preferences; how to use international operations to improve overall competi- tiveness; the choice between multidomestic, global, and transnational strategies; and the unique characteristics of competing in emerging markets.

• Chapter 8 introduces the topic of corporate-level strategy—a topic of concern for multibusiness companies pursuing diversification. This chapter begins by explaining why successful diversification strategies must create shareholder value and lays out the three essential tests that a strategy must pass to achieve this goal (the industry attractiveness, cost of entry, and better-off tests). Corporate strategy topics covered in the chapter include methods of entering new businesses, related diversification, unrelated diversification, combined related and unrelated diversification approaches, and strategic options for improving the overall performance of an already diversified company. The chapter’s analytical spotlight is trained on the techniques and pro- cedures for assessing a diversified company’s business portfolio—the relative attrac- tiveness of the various businesses the company has diversified into, the company’s competitive strength in each of its business lines, and the strategic fit and resource fit among a diversified company’s different businesses. The chapter concludes with a brief survey of a company’s four main post-diversification strategy alternatives: (1) sticking closely with the existing business lineup, (2) broadening the diversification base, (3) divesting some businesses and retrenching to a narrower diversification base, and (4) restructuring the makeup of the company’s business lineup.

• Although the topic of ethics and values comes up at various points in this text- book, Chapter 9 brings more direct attention to such issues and may be used as a standalone assignment in either the early, middle, or late part of a course. It concerns the themes of ethical standards in business, approaches to ensuring con- sistent ethical standards for companies with international operations, corporate social responsibility, and environmental sustainability. The contents of this chapter are sure to give students some things to ponder, rouse lively discussion, and help to make students more ethically aware and conscious of why all companies should conduct their business in a socially responsible and sustainable manner.

• Chapter 10 is anchored around a pragmatic, compelling conceptual framework: (1) building dynamic capabilities, core competencies, resources, and structure

Final PDF to printer

gam27636_fm_i-xxxvi.indd xi 01/16/18 09:52 PM

Preface xi

necessary for proficient strategy execution; (2) allocating ample resources to strategy-critical activities; (3) ensuring that policies and procedures facilitate rather than impede strategy execution; (4) pushing for continuous improvement in how value chain activities are performed; (5) installing information and operating sys- tems that enable company personnel to better carry out essential activities; (6) tying rewards and incentives directly to the achievement of performance targets and good strategy execution; (7) shaping the work environment and corporate culture to fit the strategy; and (8) exerting the internal leadership needed to drive execution for- ward. The recurring theme throughout the chapter is that implementing and exe- cuting strategy entails figuring out the specific actions, behaviors, and conditions that are needed for a smooth strategy-supportive operation—the goal here is to ensure that students understand that the strategy implementing/strategy executing phase is a make-it-happen-right kind of managerial exercise that leads to operating excellence and good performance.

In this latest edition, we have put our utmost effort into ensuring that the 10 chapters are consistent with the latest and best thinking of academics and practitioners in the field of strategic management and hit the bull’s-eye in topical coverage for senior- and MBA-level strategy courses. The ultimate test of the text, of course, is the positive peda- gogical impact it has in the classroom. If this edition sets a more effective stage for your lectures and does a better job of helping you persuade students that the discipline of strategy merits their rapt attention, then it will have fulfilled its purpose.

The Case Collection The 12-case lineup in this edition is flush with interesting companies and valuable les- sons for students in the art and science of crafting and executing strategy. There is a good blend of cases from a length perspective—about one-third are under 10 pages yet offer plenty for students to chew on; about a third are medium-length cases; and the remaining one-third are detail-rich cases that call for sweeping analysis.

At least 11 of the 12 cases involve companies, products, people, or activities that students will have heard of, know about from personal experience, or can easily iden- tify with. The lineup includes at least four cases that will provide students with insight into the special demands of competing in industry environments where technological developments are an everyday event, product life cycles are short, and competitive maneuvering among rivals comes fast and furious. All of the cases involve situations where the role of company resources and competitive capabilities in the strategy for- mulation, strategy execution scheme is emphasized. Scattered throughout the lineup are seven cases concerning non-U.S. companies, globally competitive industries, and/or cross-cultural situations; these cases, in conjunction with the globalized content of the text chapters, provide abundant material for linking the study of strategic management tightly to the ongoing globalization of the world economy. You will also find five cases dealing with the strategic problems of family-owned or relatively small entrepreneurial businesses and 10 cases involving public companies and situations where students can do further research on the Internet. A number of the cases have accompanying video- tape segments.

Final PDF to printer

gam27636_fm_i-xxxvi.indd xii 01/16/18 09:52 PM

xii Preface

The Two Strategy Simulation Supplements: The Business Strategy Game and GLO-BUS The Business Strategy Game and GLO-BUS: Developing Winning Competitive Strategies— two competition-based strategy simulations that are delivered online and that feature automated processing and grading of performance—are being marketed by the publisher as companion supplements for use with the sixth edition (and other texts in the field). In both The Business Strategy Game (BSG) and GLO-BUS, class members are divided into teams of one to five persons and assigned to run a company that competes head-to- head against companies run by other class members. In BSG, the teams run an athletic footwear company; in GLO-BUS, teams run a company that produces wearable action cameras and camera-equipped copter drones used for commercial purposes. In both simulations, companies compete in a global market arena, selling their products in four geographic regions—Europe-Africa, North America, Asia-Pacific, and Latin America. Each management team is called upon to craft a strategy for their company and make decisions relating to plant operations, workforce compensation, pricing and marketing, social responsibility/citizenship, and finance.

Company co-managers are held accountable for their decision making. Each compa- ny’s performance is scored on the basis of earnings per share, return-on-equity investment, stock price, credit rating, and image rating. Rankings of company performance, along with a wealth of industry and company statistics, are available to company co-managers after each decision round to use in making strategy adjustments and operating decisions for the next competitive round. You can be certain that the market environment, strategic issues, and operating challenges that company co-managers must contend with are very tightly linked to what your class members will be reading about in the text chapters.

We suggest that you schedule 1 or 2 practice rounds and anywhere from 4 to 10 regu- lar (scored) decision rounds (more rounds are better than fewer rounds). Each deci- sion round represents a year of company operations and will entail roughly two hours of time for company co-managers to complete. In traditional 13-week, semester-long courses, there is merit in scheduling one decision round per week. In courses that run 5 to 10 weeks, it is wise to schedule two decision rounds per week for the last several weeks of the term (sample course schedules are provided for courses of varying length and varying numbers of class meetings).

When the instructor-specified deadline for a decision round arrives, the simulation server automatically accesses the saved decision entries of each company, determines the competitiveness and buyer appeal of each company’s product offering relative to the other companies being run by students in your class, and then awards sales and market shares to the competing companies, geographic region by geographic region. The unit sales volumes awarded to each company are totally governed by:

• How its prices compare against the prices of rival brands.

• How its product quality compares against the quality of rival brands.

• How its product line breadth and selection compare.

• How its advertising effort compares.

• And so on, for a total of 11 competitive factors that determine unit sales and market shares.

Final PDF to printer

gam27636_fm_i-xxxvi.indd xiii 01/16/18 09:52 PM

Preface xiii

The competitiveness and overall buyer appeal of each company’s product offering in comparison to the product offerings of rival companies is all-decisive—this algorithmic fea- ture is what makes BSG and GLO-BUS “competition-based” strategy simulations. Once each company’s sales and market shares are awarded based on the competitiveness and buyer appeal of its respective overall product offering vis-à-vis those of rival companies, the various company and industry reports detailing the outcomes of the decision round are then generated. Company co-managers can access the results of the decision round 15 to 20 minutes after the decision deadline.

The Compelling Case for Incorporating Use of a Strategy Simulation There are three exceptionally important benefits associated with using a competition- based simulation in strategy courses taken by seniors and MBA students:

• A three-pronged text-case-simulation course model delivers significantly more teach- ing and learning power than the traditional text-case model. Using both cases and a strategy simulation to drill students in thinking strategically and applying what they read in the text chapters is a stronger, more effective means of helping them connect theory with practice and develop better business judgment. What cases do that a simulation cannot is give class members broad exposure to a variety of com- panies and industry situations and insight into the kinds of strategy-related prob- lems managers face. But what a competition-based strategy simulation does far better than case analysis is thrust class members squarely into an active, hands-on managerial role where they are totally responsible for assessing market conditions, determining how to respond to the actions of competitors, forging a long-term direction and strategy for their company, and making all kinds of operating deci- sions. Because they are held fully accountable for their decisions and their com- pany’s performance, co-managers are strongly motivated to dig deeply into company operations, probe for ways to be more cost-efficient and competitive, and ferret out strategic moves and decisions calculated to boost company performance. Conse- quently, incorporating both case assignments and a strategy simulation to develop the skills of class members in thinking strategically and applying the concepts and tools of strategic analysis turns out to be more pedagogically powerful than relying solely on case assignments: there is stronger retention of the lessons learned and better achieve- ment of course learning objectives. To provide you with quantitative evidence of the learning that occurs with using The Business Strategy Game or GLO-BUS, there is a built-in Learning Assurance Report showing how well each class member per- forms on nine skills/learning measures versus tens of thousands of students world- wide who have completed the simulation in the past 12 months.

• The competitive nature of a strategy simulation arouses positive energy and steps up the whole tempo of the course by a notch or two. Nothing sparks class excitement quicker or better than the concerted efforts on the part of class members during each decision round to achieve a high industry ranking and avoid the perilous consequences of being outcompeted by other class members. Students really enjoy taking on the role of a manager, running their own company, crafting strategies, making all kinds of operating decisions, trying to outcompete rival companies, and

Final PDF to printer

gam27636_fm_i-xxxvi.indd xiv 01/16/18 09:52 PM

xiv Preface

getting immediate feedback on the resulting company performance. Co-managers become emotionally invested in running their company and figuring out what stra- tegic moves to make to boost their company’s performance. All this stimulates learning and causes students to see the practical relevance of the subject matter and the benefits of taking your course.

• Use of a fully automated online simulation reduces the time instructors spend on course preparation, course administration, and grading. Since the simulation exercise involves a 20- to 30-hour workload for student-teams (roughly 2 hours per deci- sion round times 10 to 12 rounds, plus optional assignments), simulation adopters often compensate by trimming the number of assigned cases from, say, 10 to 12 to perhaps 4 to 6. This significantly reduces the time instructors spend reading cases, studying teaching notes, and otherwise getting ready to lead class discussion of a case or grade oral team presentations. Course preparation time is further cut because you can use several class days to have students meet in the computer lab to work on upcoming decision rounds or a three-year strategic plan (in lieu of lec- turing on a chapter or covering an additional assigned case). Not only does use of a simulation permit assigning fewer cases, but it also permits you to eliminate at least one assignment that entails considerable grading on your part. Grading one less written case or essay exam or other written assignment saves enormous time. With BSG and GLO-BUS, grading is effortless and takes only minutes; once you enter percentage weights for each assignment in your online grade book, a sug- gested overall grade is calculated for you. You’ll be pleasantly surprised—and quite pleased—at how little time it takes to gear up for and to administer The Business Strategy Game or GLO-BUS.

In sum, incorporating use of a strategy simulation turns out to be a win-win proposition for both students and instructors. Moreover, a very convincing argument can be made that a competition-based strategy simulation is the single most effective teaching/learning tool that instructors can employ to teach the discipline of business and competitive strategy, to make learning more enjoyable, and to promote better achievement of course learning objectives.

Administration and Operating Features of the Two Simulations The Internet delivery and user-friendly designs of both BSG and GLO-BUS make them incredibly easy to administer, even for first-time users. And the menus and controls are so similar that you can readily switch between the two simulations or use one in your undergraduate class and the other in a graduate class. If you have not yet used either of the two simulations, you may find the following of particular interest:

• Setting up the simulation for your course is done online and takes about 10 to 15 minutes. Once setup is completed, no other administrative actions are required beyond that of moving participants to a different team (should the need arise) and monitoring the progress of the simulation (to whatever extent desired).

• Participant’s Guides are delivered electronically to class members at the website— students can read it on their monitors or print out a copy, as they prefer.

• There are two- to four-minute Video Tutorials scattered throughout the software (including each decision screen and each page of each report) that provide

Final PDF to printer

gam27636_fm_i-xxxvi.indd xv 01/16/18 09:52 PM

Preface xv

on-demand guidance to class members who may be uncertain about how to proceed.

• Complementing the Video Tutorials are detailed and clearly written Help sec- tions explaining “all there is to know” about (a) each decision entry and the rel- evant cause-effect relationships, (b) the information on each page of the Industry Reports, and (c) the numbers presented in the Company Reports. The Video Tuto- rials and the Help screens allow company co-managers to figure things out for them- selves, thereby curbing the need for students to ask the instructor “how things work.”

• Team members running the same company who are logged-in simultaneously on different computers at different locations can click a button to enter Collabora- tion Mode, enabling them to work collaboratively from the same screen in viewing reports and making decision entries, and click a second button to enter Audio Mode, letting them talk to one another.

• When in “Collaboration Mode,” each team member sees the same screen at the same time as all other team members who are logged in and have joined Collaboration Mode. If one team member chooses to view a particular decision screen, that same screen appears on the monitors for all team members in Collaboration Mode.

• Team members each control their own color-coded mouse pointer (with their first-name appearing in a color-coded box linked to their mouse pointer) and can make a decision entry or move the mouse to point to particular on-screen items.

• A decision entry change made by one team member is seen by all, in real time, and all team members can immediately view the on-screen calculations that result from the new decision entry.

• If one team member wishes to view a report page and clicks on the menu link to the desired report, that same report page will immediately appear for the other team members engaged in collaboration.

• Use of Audio Mode capability requires that team members work from a com- puter with a built-in microphone (if they want to be heard by their team mem- bers) and speakers (so they may hear their teammates) or else have a headset with a microphone that they can plug into their desktop or laptop. A headset is recommended for best results, but most laptops now are equipped with a built- in microphone and speakers that will support use of our new voice chat feature.

• Real-time VoIP audio chat capability among team members who have entered both the Audio Mode and the Collaboration Mode is a tremendous boost in functionality that enables team members to go online simultaneously on com- puters at different locations and conveniently and effectively collaborate in run- ning their simulation company.

• In addition, instructors have the capability to join the online session of any company and speak with team members, thus circumventing the need for team members to arrange for and attend a meeting in the instructor’s office. Using the standard menu for administering a particular industry, instructors can con- nect with the company desirous of assistance. Instructors who wish not only to talk but also enter Collaboration (highly recommended because all attendees

Final PDF to printer

gam27636_fm_i-xxxvi.indd xvi 01/16/18 09:52 PM

xvi Preface

are then viewing the same screen) have a red-colored mouse pointer linked to a red box labeled Instructor.

Without a doubt, the Collaboration and Voice-Chat capabilities are hugely valu- able for students enrolled in online and distance-learning courses where meeting face-to-face is impractical or time-consuming. Likewise, the instructors of online and distance-learning courses will appreciate having the capability to join the online meetings of particular company teams when their advice or assistance is requested.

• Both simulations are quite suitable for use in distance-learning or online courses (and are currently being used in such courses on numerous campuses).

• Participants and instructors are notified via e-mail when the results are ready (usually about 15 to 20 minutes after the decision round deadline specified by the instructor/game administrator).

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

• Two “open-book” multiple-choice tests of 20 questions are built into each simula- tion. The quizzes, which you can require or not as you see fit, are taken online and automatically graded, with scores reported instantaneously to participants and automatically recorded in the instructor’s electronic grade book. Students are auto- matically provided with three sample questions for each test.

• Both simulations contain a three-year strategic plan option that you can assign. Scores on the plan are automatically recorded in the instructor’s online grade book.

• At the end of the simulation, you can have students complete online peer evalua- tions (again, the scores are automatically recorded in your online grade book).

• Both simulations have a Company Presentation feature that enables each team of company co-managers to easily prepare PowerPoint slides for use in describing their strategy and summarizing their company’s performance in a presentation to either the class, the instructor, or an “outside” board of directors.

• A Learning Assurance Report provides you with hard data concerning how well your students performed vis-à-vis students playing the simulation worldwide over the past 12 months. The report is based on nine measures of student proficiency, business know-how, and decision-making skill and can also be used in evaluating the extent to which your school’s academic curriculum produces the desired degree of stu- dent learning insofar as accreditation standards are concerned.

For more details on either simulation, please consult Section 2 of the Instructor’s Manual accompanying this text or register as an instructor at the simulation websites (www.bsg-online.com and www.globus.com) to access even more comprehensive infor- mation. You should also consider signing up for one of the webinars that the simulation authors conduct several times each month (sometimes several times weekly) to demon- strate how the software works, walk you through the various features and menu options,

Final PDF to printer

gam27636_fm_i-xxxvi.indd xvii 01/16/18 09:52 PM

Preface xvii

and answer any questions. You have an open invitation to call the senior author of this text at (205) 722-9145 to arrange a personal demonstration or talk about how one of the simulations might work in one of your courses. We think you’ll be quite impressed with the cutting-edge capabilities that have been programmed into The Business Strategy Game and GLO-BUS, the simplicity with which both simulations can be administered, and their exceptionally tight connection to the text chapters, core concepts, and stan- dard analytical tools.

Resources and Support Materials for the Sixth Edition for Students Key Points Summaries At the end of each chapter is a synopsis of the core concepts, analytical tools, and other key points discussed in the chapter. These chapter-end synopses, along with the core con- cept definitions and margin notes scattered throughout each chapter, help students focus on basic strategy principles, digest the messages of each chapter, and prepare for tests.

Two Sets of Chapter-End Exercises Each chapter concludes with two sets of exercises. The Assurance of Learning Exercises can be used as the basis for class discussion, oral presentation assignments, short writ- ten reports, and substitutes for case assignments. The Exercises for Simulation Par- ticipants are designed expressly for use by adopters who have incorporated use of a simulation and wish to go a step further in tightly and explicitly connecting the chapter content to the simulation company their students are running. The questions in both sets of exercises (along with those Concepts & Connections illustrations that qualify as “mini cases”) can be used to round out the rest of a 75-minute class period, should your lecture on a chapter only last for 50 minutes.

The Connect Web-Based Assignment and Assessment Platform The Essentials of Strategic Management sixth edition takes full advantage of the pub- lisher’s innovative Connect assignment and assessment platform. The Connect package for this edition includes several robust and valuable features that simplify the task of assigning and grading three types of exercises for students:

• There are autograded chapter tests consisting of 20 multiple-choice questions that students can take to measure their grasp of the material presented in each of the 10 chapters.

• Connect Management includes interactive versions of two Assurance of Learning Exercises for each chapter that drill students in the use and application of the con- cepts and tools of strategic analysis. There is both an autograded and open-ended short-answer interactive exercise for each of the 10 chapters.

• The Connect Management platform also includes fully autograded interactive appli- cation exercises for each of the 12 cases in this edition. The exercises require stu- dents to work through tutorials based upon the analysis set forth in the assignment

Final PDF to printer

gam27636_fm_i-xxxvi.indd xviii 01/16/18 09:52 PM

xviii Preface

questions for the case; these exercises have multiple components such as resource and capability analysis, financial ratio analysis, identification of a company’s strat- egy, or analysis of the five competitive forces. The content of these case exercises is tailored to match the circumstances presented in each case, calling upon stu- dents to do whatever strategic thinking and strategic analysis is called for to arrive at pragmatic, analysis-based action recommendations for improving company performance. The entire exercise is autograded, allowing instructors to focus on grading only the students’ strategic recommendations.

All of the Connect exercises are automatically graded (with the exception of a few exercise components that entail student entry of essay answers), thereby simplifying the task of evaluating each class member’s performance and monitoring the learning out- comes. The progress-tracking function built into the Connect system enables you to

• View scored work immediately and track individual or group performance with assignment and grade reports.

• Access an instant view of student or class performance relative to learning objectives.

• Collect data and generate reports required by many accreditation organizations, such as AACSB International.

For Instructors Connect Management Connect’s Instructor Resources includes an Instructor’s Manual and other support materials. Your McGraw-Hill representative can arrange delivery of instructor support materials in a format-ready Standard Cartridge for Blackboard, WebCT, and other web- based educational platforms.

Instructor’s Manual The accompanying IM contains:

• A section on suggestions for organizing and structuring your course.

• Sample syllabi and course outlines.

• A set of lecture notes on each chapter.

• Answers to the chapter-end Assurance of Learning Exercises.

• A comprehensive case teaching note for each of the 12 cases. These teaching notes are filled with suggestions for using the case effectively, have very thorough, analysis- based answers to the suggested assignment questions for the case, and contain an epilogue detailing any important developments since the case was written.

A Comprehensive Test Bank and TestGen Software There is a 600+-question test bank, consisting of both multiple-choice questions and short- answer/essay questions. All of the test bank questions are also accessible via TestGen.

Final PDF to printer

gam27636_fm_i-xxxvi.indd xix 01/16/18 09:52 PM

Preface xix

TestGen is a complete, state-of-the-art test generator and editing application software that allows instructors to quickly and easily select test items from McGraw Hill’s TestGen testcontent and to organize, edit, and customize the questions and answers to rapidly generate paper tests. Questions can include stylized text, symbols, graph- ics, and equations that are inserted directly into questions using built-in mathematical templates. TestGen’s random generator provides the option to display different text or calculated number values each time questions are used. With both quick-and-simple test creation and flexible and robust editing tools, TestGen is a test generator system for today’s educators.

Test Bank and EZ Test Online There is a test bank containing over 700 multiple-choice questions and short-answer/ essay questions. It has been tagged with AACSB and Bloom’s Taxonomy criteria. All of the test bank questions are accessible within Connect. All of the test bank questions are also accessible within a computerized test bank powered by McGraw-Hill’s flexible electronic testing program, EZ Test Online (www.eztestonline.com). Using EZ Test Online allows you to create paper or online tests and quizzes. With EZ Test Online, instructors can select questions from multiple McGraw-Hill test banks or author their own and then either print the test for paper distribution or give it online.

PowerPoint Slides To facilitate delivery preparation of your lectures and to serve as chapter outlines, you’ll have access to approximately 350 colorful and professional-looking slides displaying core concepts, analytical procedures, key points, and all the figures in the text chapters.

The Business Strategy Game and GLO-BUS Online Simulations Using one of the two companion simulations is a powerful and constructive way of emotionally connecting students to the subject matter of the course. We know of no more effective way to arouse the competitive energy of students and prepare them for the challenges of real-world business decision making than to have them match strate- gic wits with classmates in running a company in head-to-head competition for global market leadership.

Final PDF to printer

gam27636_fm_i-xxxvi.indd xx 01/16/18 09:52 PM

xx

ACKNOWLEDGMENTS

We heartily acknowledge the contributions of the case researchers whose case-writing efforts appear herein and the companies whose cooperation made the cases possible. To each one goes a very special thank-you. We cannot overstate the importance of timely, carefully researched cases in contributing to a substantive study of strategic management issues and practices. From a research standpoint, strategy-related cases are invaluable in exposing the generic kinds of strategic issues that companies face in forming hypotheses about strategic behavior and in drawing experienced-based general- izations about the practice of strategic management. From an instructional standpoint, strategy cases give students essential practice in diagnosing and evaluating the strategic situations of companies and organizations, in applying the concepts and tools of stra- tegic analysis, in weighing strategic options and crafting strategies, and in tackling the challenges of successful strategy execution. Without a continuing stream of fresh, well- researched, and well-conceived cases, the discipline of strategic management would lose its close ties to the very institutions whose strategic actions and behavior it is aimed at explaining. There’s no question, therefore, that first-class case research constitutes a valuable scholarly contribution to the theory and practice of strategic management.

A great number of colleagues and students at various universities, business acquain- tances, and people at McGraw-Hill provided inspiration, encouragement, and counsel during the course of this project. Like all text authors in the strategy field, we are intel- lectually indebted to the many academics whose research and writing have blazed new trails and advanced the discipline of strategic management.

We also express our thanks to Todd M. Alessandri, Michael Anderson, Gerald D. Baumgardner, Edith C. Busija, Gerald E. Calvasina, Sam D. Cappel, Richard Churchman, John W. Collis, Connie Daniel, Christine DeLaTorre, Vickie Cox Edmondson, Diane D. Galbraith, Naomi A. Gardberg, Sanjay Goel, Les Jankovich, Jonatan Jelen, William Jiang, Bonnie Johnson, Roy Johnson, John J. Lawrence, Robert E. Ledman, Mark Lehrer, Fred Maidment, Frank Markham, Renata Mayrhofer, Simon Medcalfe, Elouise Mintz, Michael Monahan, Gerry Nkombo Muuka, Cori J. Myers, Jeryl L. Nelson, David Olson, John Perry, L. Jeff Seaton, Charles F. Seifert, Eugene S. Simko, Karen J. Smith, Susan Steiner, Troy V. Sullivan, Elisabeth J. Teal, Lori Tisher, Vincent Weaver, Jim Whitlock, and Beth Woodard. These reviewers provided valuable guidance in steering our efforts to improve earlier editions.

As always, we value your recommendations and thoughts about the book. Your com- ments regarding coverage and contents will be taken to heart, and we always are grate- ful for the time you take to call our attention to printing errors, deficiencies, and other shortcomings. Please e-mail us at john.gamble@tamucc.edu, or athompso@cba.ua.edu, or margaret.a.peteraf@tuck.dartmouth.edu.

John E. Gamble Margaret A. Peteraf Arthur A. Thompson

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxi 01/16/18 09:52 PM

xxi

TABLE OF CONTENTS

PART ONE CONCEPTS AND TECHNIQUES FOR CRAFTING AND EXECUTING STRATEGY 1 Section A: Introduction and Overview

Chapter 1 Strategy, Business Models, and Competitive Advantage 1

The Importance of a Distinctive Strategy and Competitive Approach 3

The Relationship Between a Company’s Strategy and Business Model 3

Strategy and the Quest for Competitive Advantage 4

CONCEPTS & CONNECTIONS 1.1: PANDORA, SIRIUS XM, AND OVER-THE-AIR BROADCAST RADIO: THREE CONTRASTING BUSINESS MODELS 55

The Importance of Capabilities in Building and Sustaining Competitive Advantage 6

CONCEPTS & CONNECTIONS 1.2: STARBUCKS’ STRATEGY IN THE SPECIALTY COFFEE MARKET 77

Why a Company’s Strategy Evolves over Time 8

The Three Tests of a Winning Strategy 9

Why Crafting and Executing Strategy Are Important Tasks 10

The Road Ahead 10

Key Points 11

Assurance of Learning Exercises 11

Exercises for Simulation Participants 11

Endnotes 12

Chapter 2 Strategy Formulation, Execution, and Governance 13 The Strategy Formulation, Strategy Execution Process 14

Stage 1: Developing a Strategic Vision, a Mission, and Core Values 16

CONCEPTS & CONNECTIONS 2.1: EXAMPLES OF STRATEGIC VISIONS—HOW WELL DO THEY MEASURE UP? 18

The Importance of Communicating the Strategic Vision 18

Developing a Company Mission Statement 19

Linking the Strategic Vision and Mission with Company Values 20

CONCEPTS & CONNECTIONS 2.2: PATAGONIA, INC.: A VALUES-DRIVEN COMPANY 21

Stage 2: Setting Objectives 22

The Imperative of Setting Stretch Objectives 22

What Kinds of Objectives to Set 22

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxii 01/16/18 09:52 PM

xxii Table of Contents

CONCEPTS & CONNECTIONS 2.3: EXAMPLES OF COMPANY OBJECTIVES 24

Stage 3: Crafting a Strategy 25

Strategy Formulation Involves Managers at All Organizational Levels 25

A Company’s Strategy-Making Hierarchy 26

Stage 4: Implementing and Executing the Chosen Strategy 28

Stage 5: Evaluating Performance and Initiating Corrective Adjustments 28 Corporate Governance: The Role of the Board of Directors in the Strategy Formulation, Strategy Execution Process 29

CONCEPTS & CONNECTIONS 2.4: CORPORATE GOVERNANCE FAILURES AT VOLKSWAGEN 31

Key Points 32

Assurance of Learning Exercises 33

Exercises for Simulation Participants 34

Endnotes 34

Section B: Core Concepts and Analytical Tools

Chapter 3 Evaluating a Company’s External Environment 36 Assessing the Company’s Industry and Competitive Environment 37

Question 1: What Are the Strategically Relevant Components of the Macro-Environment? 37

Question 2: How Strong Are the Industry’s Competitive Forces? 40

The Competitive Force of Buyer Bargaining Power 41

The Competitive Force of Substitute Products 43

The Competitive Force of Supplier Bargaining Power 43

The Competitive Force of Potential New Entrants 45

The Competitive Force of Rivalry Among Competing Sellers 47

The Collective Strengths of the Five Competitive Forces and Industry Profitability 50

Question 3: What Are the Industry’s Driving Forces of Change, and What Impact Will They Have? 51

The Concept of Industry Driving Forces 51

Identifying an Industry’s Driving Forces 51

Assessing the Impact of the Industry Driving Forces 53

Determining Strategy Changes Needed to Prepare for the Impact of Driving Forces 54

Question 4: How Are Industry Rivals Positioned? 54

Using Strategic Group Maps to Assess the Positioning of Key Competitors 54

CONCEPTS & CONNECTIONS 3.1: COMPARATIVE MARKET POSITIONS OF SELECTED COMPANIES IN THE CASUAL DINING INDUSTRY: A STRATEGIC GROUP MAP EXAMPLE 56

The Value of Strategic Group Maps 56

Question 5: What Strategic Moves Are Rivals Likely to Make Next? 57

Question 6: What Are the Industry Key Success Factors? 58

Question 7: Does the Industry Offer Good Prospects for Attractive Profits? 60

Key Points 61

Assurance of Learning Exercises 62

Exercises for Simulation Participants 62

Endnotes 63

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxiii 01/16/18 09:52 PM

Table of Contents xxiii

Chapter 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness 64

Question 1: How Well Is the Company’s Strategy Working? 65

Question 2: What Are the Company’s Competitively Important Resources and Capabilities? 66

Identifying Competitively Important Resources and Capabilities 66

Determining the Competitive Power of a Company’s Resources and Capabilities 67

The Importance of Dynamic Capabilities in Sustaining Competitive Advantage 69

Is the Company Able to Seize Market Opportunities and Nullify External Threats? 69

Question 3: Are the Company’s Cost Structure and Customer Value Proposition Competitive? 70

Company Value Chains 72

CONCEPTS & CONNECTIONS 4.1: THE VALUE CHAIN FOR BOLL & BRANCH 74

Benchmarking: A Tool for Assessing Whether a Company’s Value Chain Activities Are Competitive 74

The Value Chain System for an Entire Industry 76

Strategic Options for Remedying a Cost or Value Disadvantage 76

How Value Chain Activities Relate to Resources and Capabilities 79

Question 4: What Is the Company’s Competitive Strength Relative to Key Rivals? 79

Interpreting the Competitive Strength Assessments 80

Question 5: What Strategic Issues and Problems Must Be Addressed by Management? 80

Key Points 82

Assurance of Learning Exercises 83

Exercises for Simulation Participants 85

Endnotes 86

Section C: Crafting a Strategy

Chapter 5 The Five Generic Competitive Strategies 88 The Five Generic Competitive Strategies 89

Low-Cost Provider Strategies 90

The Two Major Avenues for Achieving Low-Cost Leadership 91

When a Low-Cost Provider Strategy Works Best 93

CONCEPTS & CONNECTIONS 5.1: AMAZON’S PATH TO BECOMING THE LOW-COST PROVIDER IN E-COMMERCE 94

Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy 95

Broad Differentiation Strategies 95

Approaches to Differentiation 96

Managing the Value Chain in Ways That Enhance Differentiation 96

Delivering Superior Value via a Differentiation Strategy 99

Perceived Value and the Importance of Signaling Value 99

CONCEPTS & CONNECTIONS 5.2: HOW BMW’S DIFFERENTIATION STRATEGY ALLOWED IT TO BECOME THE NUMBER-ONE LUXURY CAR BRAND 100

When a Differentiation Strategy Works Best 100

Pitfalls to Avoid in Pursuing a Differentiation Strategy 101

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxiv 01/16/18 09:52 PM

xxiv Table of Contents

Focused (or Market Niche) Strategies 102

A Focused Low-Cost Strategy 102

A Focused Differentiation Strategy 103

When a Focused Low-Cost or Focused Differentiation Strategy Is Viable 103

CONCEPTS & CONNECTIONS 5.3: CANADA GOOSE’S FOCUSED DIFFERENTIATION STRATEGY 104

The Risks of a Focused Low-Cost or Focused Differentiation Strategy 105

Best-Cost Provider Strategies 105

When a Best-Cost Provider Strategy Works Best 106

The Danger of an Unsound Best-Cost Provider Strategy 106

Successful Competitive Strategies Are Resource Based 106

CONCEPTS & CONNECTIONS 5.4: AMERICAN GIANT’S BEST-COST PROVIDER STRATEGY 107

Key Points 108

Assurance of Learning Exercises 109

Exercises for Simulation Participants 110

Endnotes 110

Chapter 6 Strengthening a Company’s Competitive Position: Strategic Moves, Timing, and Scope of Operations 111

Launching Strategic Offensives to Improve a Company’s Market Position 112

Choosing the Basis for Competitive Attack 112

Choosing Which Rivals to Attack 114

Blue Ocean Strategy—A Special Kind of Offensive 114

CONCEPTS & CONNECTIONS 6.1: BONOBOS’ BLUE OCEAN STRATEGY IN THE U.S. MEN’S FASHION RETAIL INDUSTRY 115

Using Defensive Strategies to Protect a Company’s Market Position and Competitive Advantage 115

Blocking the Avenues Open to Challengers 116

Signaling Challengers That Retaliation Is Likely 116

Timing a Company’s Offensive and Defensive Strategic Moves 116

CONCEPTS & CONNECTIONS 6.2: UBER’S FIRST-MOVER ADVANTAGE IN MOBILE RIDE-HAILING SERVICES 118

The Potential for Late-Mover Advantages or First-Mover Disadvantages 118

Deciding Whether to Be an Early Mover or Late Mover 119

Strengthening a Company’s Market Position via Its Scope of Operations 119

Horizontal Merger and Acquisition Strategies 120

Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results 122

Vertical Integration Strategies 122

The Advantages of a Vertical Integration Strategy 123

The Disadvantages of a Vertical Integration Strategy 124

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxv 01/16/18 09:52 PM

Table of Contents xxv

CONCEPTS & CONNECTIONS 6.3: KAISER PERMANENTE’S VERTICAL INTEGRATION STRATEGY 125

Outsourcing Strategies: Narrowing the Scope of Operations 125 Strategic Alliances and Partnerships 127

Failed Strategic Alliances and Cooperative Partnerships 128

The Strategic Dangers of Relying on Alliances for Essential Resources and Capabilities 128

Key Points 128

Assurance of Learning Exercises 129

Exercises for Simulation Participants 130

Endnotes 130

Chapter 7 Strategies for Competing in International Markets 132 Why Companies Expand into International Markets 133

Factors That Shape Strategy Choices in International Markets 134

Cross-Country Differences in Demographic, Cultural, and Market Conditions 134

Opportunities for Location-Based Cost Advantages 135

Industry Cluster Knowledge Sharing Opportunities 136

The Risks of Adverse Exchange Rate Shifts 136

The Impact of Government Policies on the Business Climate in Host Countries 137

Strategy Options for Entering Foreign Markets 138

Export Strategies 138

Licensing Strategies 138

Franchising Strategies 139

Foreign Subsidiary Strategies 139

Alliance and Joint Venture Strategies 140

CONCEPTS & CONNECTIONS 7.1: WALGREENS BOOTS ALLIANCE, INC.: ENTERING FOREIGN MARKETS VIA ALLIANCE FOLLOWED BY MERGER 141

International Strategy: The Three Principal Options 142

Multidomestic Strategy—A Think Local, Act Local Approach to Strategy Making 143

Global Strategy—A Think Global, Act Global Approach to Strategy Making 144

Transnational Strategy—A Think Global, Act Local Approach to Strategy Making 145

CONCEPTS & CONNECTIONS 7.2: FOUR SEASONS HOTELS: LOCAL CHARACTER, GLOBAL SERVICE 146

Using International Operations to Improve Overall Competitiveness 147

Using Location to Build Competitive Advantage 147

Using Cross-Border Coordination to Build Competitive Advantage 148

Strategies for Competing in the Markets of Developing Countries 148

Strategy Options for Competing in Developing-Country Markets 149

Key Points 150

Assurance of Learning Exercises 151

Exercises for Simulation Participants 152

Endnotes 152

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxvi 01/16/18 09:52 PM

xxvi Table of Contents

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company 154

When Business Diversification Becomes a Consideration 156

Building Shareholder Value: The Ultimate Justification for Business Diversification 156

Approaches to Diversifying the Business Lineup 157

Diversification by Acquisition of an Existing Business 157

Entering a New Line of Business Through Internal Development 157

Using Joint Ventures to Achieve Diversification 157

Choosing the Diversification Path: Related Versus Unrelated Businesses 158

Diversifying into Related Businesses 159

Strategic Fit and Economies of Scope 160

The Ability of Related Diversification to Deliver Competitive Advantage and Gains in Shareholder Value 160

CONCEPTS & CONNECTIONS 8.1: THE KRAFT–HEINZ MERGER: PURSUING THE BENEFITS OF CROSS-BUSINESS STRATEGIC FIT 161

Diversifying into Unrelated Businesses 162

Building Shareholder Value Through Unrelated Diversification 162

The Pitfalls of Unrelated Diversification 162

Misguided Reasons for Pursuing Unrelated Diversification 163

Diversifying into Both Related and Unrelated Businesses 164

Evaluating the Strategy of a Diversified Company 164

Step 1: Evaluating Industry Attractiveness 165

Step 2: Evaluating Business-Unit Competitive Strength 167

Step 3: Determining the Competitive Value of Strategic Fit in Multibusiness Companies 171

Step 4: Evaluating Resource Fit 171

Step 5: Ranking Business Units and Setting a Priority for Resource Allocation 174

Step 6: Crafting New Strategic Moves to Improve the Overall Corporate Performance 175

Key Points 178

Assurance of Learning Exercises 179

Exercises for Simulation Participants 180

Endnotes 181

Chapter 9 Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy 182

What Do We Mean by Business Ethics? 183

Drivers of Unethical Strategies and Business Behavior 184

The Business Case for Ethical Strategies 185 Ensuring a Strong Commitment to Business Ethics in Companies with International Operations 186

The School of Ethical Universalism 186

CONCEPTS & CONNECTIONS 9.1: IKEA’S GLOBAL SUPPLIER STANDARDS: MAINTAINING LOW COSTS WHILE FIGHTING THE ROOT CAUSES OF CHILD LABOR 187

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxvii 01/16/18 09:52 PM

Table of Contents xxvii

The School of Ethical Relativism 187

Integrative Social Contracts Theory 188

Strategy, Corporate Social Responsibility, and Environmental Sustainability 189

What Do We Mean by Corporate Social Responsibility? 189

CONCEPTS & CONNECTIONS 9.2: WARBY PARKER: COMBINING CORPORATE SOCIAL RESPONSIBILITY WITH AFFORDABLE FASHION 191

What Do We Mean by Sustainability and Sustainable Business Practices? 192

Crafting Corporate Social Responsibility and Sustainability Strategies 193

The Business Case for Socially Responsible Behavior 194

Key Points 196

Assurance of Learning Exercises 197

Exercises for Simulation Participants 197

Endnotes 198

Section D: Executing the Strategy

Chapter 10 Superior Strategy Execution—Another Path to Competitive Advantage 199

The Principal Managerial Components of Strategy Execution 200

Building an Organization Capable of Good Strategy Execution: Three Key Actions 201

Staffing the Organization 202

Acquiring, Developing, and Strengthening Key Resources and Capabilities 203

CONCEPTS & CONNECTIONS 10.1: ZARA’S STRATEGY EXECUTION CAPABILITIES 204

Matching Organizational Structure to the Strategy 206

Allocating Resources to Strategy-Critical Activities 209

Instituting Strategy-Supportive Policies and Procedures 210

Striving for Continuous Improvement in Processes and Activities 211

CONCEPTS & CONNECTIONS 10.2: CHARLESTON AREA MEDICAL CENTER’S SIX SIGMA PROGRAM 213

The Difference Between Business Process Reengineering and Continuous Improvement Programs 213

Installing Information and Operating Systems 214

Using Rewards and Incentives to Promote Better Strategy Execution 215

Motivation and Reward Systems 215

Guidelines for Designing Monetary Incentive Systems 215

Nonmonetary Rewards 216

Instilling a Corporate Culture That Promotes Good Strategy Execution 217

CONCEPTS & CONNECTIONS 10.3: HOW THE BEST COMPANIES TO WORK FOR MOTIVATE AND REWARD EMPLOYEES 218

High-Performance Cultures 218

CONCEPTS & CONNECTIONS 10.4: STRONG GUIDING PRINCIPLES DRIVE THE HIGH-PERFORMANCE CULTURE AT EPIC 219

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxviii 01/16/18 09:52 PM

xxviii Table of Contents

Adaptive Cultures 220

Unhealthy Corporate Cultures 220

Changing a Problem Culture 222

Leading the Strategy Execution Process 224

Staying on Top of How Well Things Are Going 225

Putting Constructive Pressure on Organizational Units to Achieve Good Results and Operating Excellence 225

Initiating Corrective Actions to Improve Both the Company’s Strategy and Its Execution 226

Key Points 226

Assurance of Learning Exercises 227

Exercises for Simulation Participants 228

Endnotes 229

Appendix Key Financial Ratios: How to Calculate Them and What They Mean 231

PART TWO CASES IN CRAFTING AND EXECUTING STRATEGY 233

Cases

Case 1 Airbnb, Inc., in 2017 233 John D. Varlaro, Johnson & Wales University John E. Gamble, Texas A&M University–Corpus Christi

Case 2 Costco Wholesale in 2017: Mission, Business Model, and Strategy 238 Arthur A. Thompson Jr., The University of Alabama

Case 3 Competition in the Craft Brewing Industry in 2017 261 John D. Varlaro, Johnson & Wales University John E. Gamble, Texas A&M University–Corpus Christi

Case 4 Fitbit, Inc., in 2017: Can It Revive Its Strategy and Reverse Mounting Losses? 271 Rochelle R. Brunson, Baylor University Marlene M. Reed, Baylor University

Case 5 lululemon athletica, inc., in 2017: Is the Company on the Path to Becoming a High Performer Once Again? 279 Arthur A. Thompson, The University of Alabama

Case 6 Gap Inc.: Can It Develop a Strategy to Connect with Consumers in 2017? 298 John D. Varlaro, Johnson & Wales University John E. Gamble, Texas A&M University–Corpus Christi

Case 7 GoPro in 2017: Will Its Turnaround Strategy Restore Profitability? 307 David L. Turnipseed, University of South Alabama John E. Gamble, Texas A&M University–Corpus Christi

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxix 01/16/18 09:52 PM

Table of Contents xxix

Case 8 Ricoh Canada 322 Jonathan Fast, Queen’s University Prescott C. Ensign, Wilfrid Laurier University

Case 9 Mondelēz International’s Diversification Strategy in 2017: Has Corporate Restructuring Benefited Shareholders? 335 John E. Gamble, Texas A&M University–Corpus Christi

Case 10 Robin Hood 346 Joseph Lampel, Alliance Manchester Business School

Case 11 Rosen Hotels & Resorts 348 Randall D. Harris, Texas A&M University–Corpus Christi

Case 12 TOMS Shoes in 2016: An Ongoing Dedication to Social Responsibility 360 Margaret A. Peteraf, Tuck School of Business at Dartmouth Sean Zhang and Meghan L. Cooney, Research Assistants, Dartmouth College

Glossary 369

Indexes Organization 373 Subject 379 Name 390

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxx 01/16/18 09:52 PM

©McGraw-Hill Education

McGraw-Hill Connect® is a highly reliable, easy-to- use homework and learning management solution that utilizes learning science and award-winning adaptive tools to improve student results.

73% of instructors who use Connect

require it; instructor satisfaction increases by 28% when Connect

is required.

Over 7 billion questions have been answered, making McGraw-Hill

Education products more intelligent, reliable, and precise.

Using Connect improves retention rates by 19.8 percentage points, passing rates by 12.7 percentage points, and exam

scores by 9.1 percentage points.

Connect content is authored by the world’s best subject matter experts, and is available to your class through a simple and intuitive interface.

The Connect eBook makes it easy for students to access their reading material on smartphones and tablets. They can study on the go and don’t need internet access to use the eBook as a reference, with full functionality.

Multimedia content such as videos, simulations, and games drive student engagement and critical thinking skills.

Quality Content and Learning Resources

Connect’s assignments help students contextualize what they’ve learned through application, so they can better understand the material and think critically.

Connect will create a personalized study path customized to individual student needs through SmartBook®.

SmartBook helps students study more efficiently by delivering an interactive reading experience through adaptive highlighting and review.

Homework and Adaptive Learning

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxxi 01/16/18 09:52 PM

More students earn As and Bs when they

use Connect.

www.mheducation.com/connect

©Hero Images/Getty Images

Connect Insight® generates easy-to-read reports on individual students, the class as a whole, and on specific assignments.

The Connect Insight dashboard delivers data on performance, study behavior, and effort. Instructors can quickly identify students who struggle and focus on material that the class has yet to master.

Connect automatically grades assignments and quizzes, providing easy-to-read reports on individual and class performance.

Robust Analytics and Reporting

Connect integrates with your LMS to provide single sign-on and automatic syncing of grades. Integration with Blackboard®, D2L®, and Canvas also provides automatic syncing of the course calendar and assignment-level linking.

Connect offers comprehensive service, support, and training throughout every phase of your implementation.

If you’re looking for some guidance on how to use Connect, or want to learn tips and tricks from super users, you can find tutorials as you work. Our Digital Faculty Consultants and Student Ambassadors offer insight into how to achieve the results you want with Connect.

Trusted Service and Support

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxxii 01/16/18 09:52 PM

xxxii

COURSE DESIGN AND DELIVERY

CREATE Instructors can now tailor their teaching resources to match the way they teach! With McGraw-Hill Create, www.

mcgrawhillcreate.com, instructors can easily rearrange chapters, combine material from other content sources, and quickly upload and integrate their own content, such as course syllabi or teaching notes. Find the right content in Create by searching through thousands of leading McGraw-Hill textbooks. Arrange the material to fit your teach- ing style. Order a Create book and receive a complimentary print review copy in three to five business days or a complimentary electronic review copy via e-mail within one hour. Go to www.mcgrawhillcreate.com today and register.

TEGRITY CAMPUS Tegrity makes class time available 24/7 by automatically cap- turing every lecture in a searchable format for students to

review when they study and complete assignments. With a simple one-click start-and- stop process, you capture all computer screens and corresponding audio. Students can replay any part of any class with easy-to-use browser-based viewing on a PC or Mac. Educators know that the more students can see, hear, and experience class resources, the better they learn. In fact, studies prove it. With patented Tegrity “search anything” technology, students instantly recall key class moments for replay online or on iPods and mobile devices. Instructors can help turn all their students’ study time into learning moments immediately supported by their lecture. To learn more about Tegrity, watch a two-minute Flash demo at http://tegritycampus.mhhe.com.

BLACKBOARD® PARTNERSHIP McGraw-Hill Education and Blackboard have teamed up to simplify your life. Now you and your students can access Connect and Create right from within your Blackboard course—all with one single sign-on. The grade books are seamless, so when a student completes an integrated Connect assignment, the grade for that assign- ment automatically (and instantly) feeds your Blackboard grade center. Learn more at www.domorenow.com.

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxxiii 01/16/18 09:52 PM

Course Design and Delivery xxxiii

McGRAW-HILL CAMPUS™ McGraw-Hill Campus is a new one-stop teaching and learning experience available to users of any learning management sys-

tem. This institutional service allows faculty and students to enjoy single sign-on (SSO) access to all McGraw-Hill Higher Education materials, including the award-winning McGraw-Hill Connect platform, from directly within the institution’s website. With McGraw-Hill Campus, faculty receive instant access to teaching materials (e.g., eText- books, test banks, PowerPoint slides, animations, learning objectives, etc.), allowing them to browse, search, and use any instructor ancillary content in our vast library at no additional cost to instructor or students. In addition, students enjoy SSO access to a variety of free content (e.g., quizzes, flash cards, narrated presentations, etc.) and subscription-based products (e.g., McGraw-Hill Connect). With McGraw-Hill Cam- pus enabled, faculty and students will never need to create another account to access McGraw-Hill products and services. Learn more at www.mhcampus.com.

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxxiv 01/16/18 09:52 PM

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxxv 01/16/18 09:52 PM

ESSENTIALS OF

STRATEGIC MANAGEMENT

Final PDF to printer

gam27636_fm_i-xxxvi.indd xxxvi 01/16/18 09:52 PM

Final PDF to printer

1

gam27636_ch01_001-012.indd 1 01/09/18 07:38 PM

LEARNING OBJECTIVES

After reading this chapter, you should be able to:

LO1-1 Understand what is meant by a company’s strategy.

LO1-2 Explain why a company needs a creative, distinctive strategy that sets it apart from rivals.

LO1-3 Explain why it is important for a company to have a viable business model that outlines the company’s customer value proposition and its profit formula.

LO1-4 Identify the five most dependable strategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage.

LO1-5 Understand that a company’s strategy tends to evolve over time because of changing circumstances and ongoing management efforts to improve the company’s strategy.

LO1-6 Identify the three tests of a winning strategy.

1

c h

a p

te r

Strategy, Business Models, and Competitive Advantage

Final PDF to printer

2 Part 1 Section A: Introduction and Overview

gam27636_ch01_001-012.indd 2 01/09/18 07:38 PM

According to The Economist, a leading publication on business, economics, and inter- national affairs, “In business, strategy is king. Leadership and hard work are all very well and luck is mighty useful, but it is strategy that makes or breaks a firm.”1 Luck and circumstance can explain why some companies are blessed with initial, short-lived success. But only a well-crafted, well-executed, constantly evolving strategy can explain why an elite set of companies somehow manages to rise to the top and stay there, year after year, pleasing their customers, shareholders, and other stakeholders alike in the process. Companies such as Apple, Samsung, Disney, Emirates Airlines, Microsoft, Alphabet (formerly Google), Berkshire Hathaway, General Electric, and Southwest Airlines come to mind.

In this opening chapter, we define the concept of strategy and describe its many facets. We explain what is meant by a competitive advantage, discuss the relationship between a company’s strategy and its business model, and introduce you to the kinds of competitive strategies that can give a company an advantage over rivals in attracting customers and earning above-average profits. We look at what sets a winning strategy apart from others and why the caliber of a company’s strategy determines whether the company will enjoy a competitive advantage over other firms. By the end of this chap- ter, you will have a clear idea of why the tasks of crafting and executing strategy are core management functions and why excellent execution of an excellent strategy is the most reliable recipe for turning a company into a standout performer over the long term.

Understand what is meant by a company’s strategy.LO1-1

A company’s strategy is the set of actions that its managers take to outperform the company’s competi- tors and achieve superior profitability. The objective of a well-crafted strategy is not merely temporary com- petitive success and profits in the short run, but rather the sort of lasting success that can support growth and

secure the company’s future over the long term. Achieving this entails making a mana- gerial commitment to a coherent array of well-considered choices about how to com- pete.2 These include choices about:

• How to create products or services that attract and please customers.

• How to position the company in the industry.

• How to develop and deploy resources to build valuable competitive capabilities.

• How each functional piece of the business (R&D, supply chain activities, produc- tion, sales and marketing, distribution, finance, and human resources) will be operated.

• How to achieve the company’s performance targets.

In most industries, companies have considerable freedom in choosing the hows of strategy. Thus some rivals strive to create superior value for customers by achieving lower costs than rivals, while others pursue product superiority or personalized cus- tomer service or the development of capabilities that rivals cannot match. Some com- petitors position themselves in only one part of the industry’s chain of production/ distribution activities, while others are partially or fully integrated, with operations

CORE CONCEPT A company’s strategy is the set of actions that its managers take to outperform the company’s competitors and achieve superior profitability.

Final PDF to printer

Chapter 1 Strategy, Business Models, and Competitive Advantage 3

gam27636_ch01_001-012.indd 3 01/09/18 07:38 PM

ranging from components production to manufacturing and assembly to wholesale dis- tribution or retailing. Some competitors deliberately confine their operations to local or regional markets; others opt to compete nationally, internationally (several countries), or globally. Some companies decide to operate in only one industry, while others diver- sify broadly or narrowly, into related or unrelated industries.

The Importance of a Distinctive Strategy and Competitive Approach

Explain why a company needs a creative, distinctive strategy that sets it apart from rivals.LO1-2

For a company to matter in the minds of customers, its strategy needs a distinctive element that sets it apart from rivals and produces a competitive edge. A strategy must tightly fit a company’s own particular situation, but there is no shortage of opportunity to fashion a strategy that is discernibly different from the strategies of rivals. In fact, com- petitive success requires a company’s managers to make strategic choices about the key building blocks of its strategy that differ from the choices made by competitors—not 100 percent different but at least different in several important respects. A strategy stands a chance of succeeding only when it is predicated on actions, business approaches, and competitive moves aimed at appealing to buyers in ways that set a company apart from rivals. Simply trying to mimic the strategies of the industry’s successful com- panies never works. Rather, every company’s strategy needs to have some distinctive element that draws in customers and produces a competitive edge. Strategy, at its essence, is about competing differently—doing what rival firms don’t do or, better yet, what rival firms can’t do.3

The Relationship Between a Company’s Strategy and Business Model

Explain why it is important for a company to have a viable business model that outlines the company’s customer value proposition and its profit formula.

LO1-3

Closely related to the concept of strategy is the concept of a company’s business model. While the company’s strategy sets forth an approach to offering superior value, a company’s business model is management’s blueprint for delivering a valuable product or service to customers in a manner that will yield an attractive profit.4 The two elements of a company’s business model are (1) its customer value proposition and (2) its profit formula. The customer value proposition is

Mimicking the strategies of successful industry rivals—with either copycat product offerings or efforts to stake out the same market position— rarely works. A creative, distinctive strategy that sets a company apart from rivals and yields a competitive advantage is a company’s most reli- able ticket for earning above-average profits.

CORE CONCEPT A company’s business model sets forth how its strategy and operating approaches will create value for customers, while at the same time gen- erating ample revenues to cover costs and real- izing a profit. The two elements of a company’s business model are its (1) customer value proposi- tion and (2) its profit formula.

Final PDF to printer

4 Part 1 Section A: Introduction and Overview

gam27636_ch01_001-012.indd 4 01/09/18 07:38 PM

established by the company’s overall strategy and lays out the company’s approach to satisfying buyer wants and needs at a price customers will consider a good value. The greater the value provided and the lower the price, the more attractive the value proposition is to customers. The profit formula describes the company’s approach to determining a cost structure that will allow for acceptable profits given the pricing tied to its customer value proposition. The lower the costs given the customer value proposition, the greater the ability of the business model to be a moneymaker. The nitty-gritty issue surrounding a company’s business model is whether it can execute its customer value proposition profitably. Just because company managers have crafted a strategy for competing and running the business does not automatically mean the strategy will lead to profitability—it may or it may not.5

Cable television providers utilize a business model, keyed to delivering news and entertainment that viewers will find valuable, to secure sufficient revenues from sub- scriptions and advertising to cover operating expenses and allow for profits. Aircraft engine manufacturer Rolls-Royce employs a “power-by-the-hour” business model that charges airlines leasing fees for engine use, maintenance, and repairs based upon actual hours flown. The company retains ownership of the engines and is able to minimize engine maintenance costs through the use of sophisticated sensors that optimize maintenance and repair schedules. Gillette’s business model in razor blades involves achieving economies of scale in the production of its shaving products, selling razors at an attractively low price, and then making money on repeat purchases of razor blades. Concepts & Connections 1.1 discusses three contrasting business models in radio broadcasting.

Strategy and the Quest for Competitive Advantage

Identify the five most dependable strategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage.

LO1-4

The heart and soul of any strategy is the actions and moves in the marketplace that managers are taking to gain a competitive edge over rivals.6 Five of the most frequently used and dependable strategic approaches to setting a company apart from rivals and winning a sustainable competitive advantage are:

1. A low-cost provider strategy—achieving a cost-based advantage over rivals. Walmart and Southwest Airlines have earned strong market positions because of the low- cost advantages they have achieved over their rivals. Low-cost provider strategies can produce a durable competitive edge when rivals find it hard to match the low- cost leader’s approach to driving costs out of the business.

2. A broad differentiation strategy—seeking to differentiate the company’s product or service from rivals’ in ways that will appeal to a broad spectrum of buyers. Suc- cessful adopters of broad differentiation strategies include Johnson & Johnson in baby products (product reliability) and Apple (innovative products). Differentia- tion strategies can be powerful so long as a company is sufficiently innovative to thwart rivals’ attempts to copy or closely imitate its product offering.

Final PDF to printer

Chapter 1 Strategy, Business Models, and Competitive Advantage 5

gam27636_ch01_001-012.indd 5 01/09/18 07:38 PM

PANDORA, SIRIUS XM, AND OVER-THE-AIR BROADCAST RADIO: THREE CONTRASTING BUSINESS MODELS

Pandora Sirius XM Over-the-Air Radio Broadcasters

Customer value proposition

• Through free-of-charge Internet radio service, allowed PC, tablet computer, and smartphone users to create up to 100 personalized music and comedy stations

• Utilized algorithms to generate playlists based on users’ predicted music preferences

• Offered programming interrupted by brief, occasional ads; eliminated advertising for Pandora One subscribers

• For a monthly subscription fee, provided satellite- based music, news, sports, national and regional weather, traffic reports in limited areas, and talk radio programming

• Also offered subscribers streaming Internet channels and the ability to create personalized, commercial-free stations for online and mobile listening

• Offered programming interrupted only by brief, occasional ads

• Provided free-of-charge music, national and local news, local traffic reports, national and local weather, and talk radio programming

• Included frequent programming interruption for ads

Profit Formula Revenue generation: Display, audio, and video ads targeted to different audiences and sold to local and national buyers; subscription revenues generated from an advertising-free option called Pandora One

Cost structure: Fixed costs associated with developing software for computers, tablets, and smartphones

Fixed and variable costs related to operating data centers to sup- port streaming network content royalties, marketing, and support activities

Revenue generation: Monthly subscription fees, sales of satel- lite radio equipment, and adver- tising revenues

Cost structure: Fixed costs associated with operating a satellite-based music delivery service and streaming Internet service

Fixed and variable costs related to programming and content royalties, marketing, and support activities

Revenue generation: Advertis- ing sales to national and local businesses

Cost structure: Fixed costs associated with terrestrial broadcasting operations

Fixed and variable costs related to local news reporting, advertising sales operations, network affiliate fees, programming and content roy- alties, commercial production activi- ties, and support activities

Profit margin: Profitability depen- dent on generating sufficient advertising revenues and sub- scription revenues to cover costs and provide attractive profits

Profit margin: Profitability depen- dent on attracting a sufficiently large number of subscribers to cover costs and provide attractive profits

Profit margin: Profitability dependent on generating sufficient advertising revenues to cover costs and provide attractive profits

Sources: Company documents, 10-Ks, and information posted on their websites.

&Concepts Connections 1.1

Final PDF to printer

6 Part 1 Section A: Introduction and Overview

gam27636_ch01_001-012.indd 6 01/09/18 07:38 PM

3. A focused low-cost strategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by having lower costs than rivals and thus being able to serve niche members at a lower price. Private-label manufacturers of food, health and beauty products, and nutritional supplements use their low-cost advan- tage to offer supermarket buyers lower prices than those demanded by producers of branded products.

4. A focused differentiation strategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals’ prod- ucts. Louis Vuitton and Rolex have sustained their advantage in the luxury goods industry through a focus on aff luent consumers demanding luxury and prestige.

5. A best-cost provider strategy—giving customers more value for the money by satisfy- ing buyers’ expectations on key quality/features/performance/service attributes, while beating their price expectations. This approach is a hybrid strategy that blends elements of low-cost provider and differentiation strategies; the aim is to have the lowest (best) costs and prices among sellers offering products with com- parable differentiating attributes. Target’s best-cost advantage allows it to give dis- count store shoppers more value for the money by offering an attractive product lineup and an appealing shopping ambience at low prices.

In Concepts & Connections 1.2, it is evident that Starbucks has gained a com- petitive advantage over rivals through its efforts to offer the highest quality coffee-

based beverages, create an emotional attachment with customers, expand its global presence, expand the product line, and ensure consistency in store opera- tions. A creative, distinctive strategy such as that used by Starbucks is a company’s most reliable ticket for developing a sustainable competitive advantage and earning above-average profits. A sustainable competi- tive advantage allows a company to attract sufficiently large numbers of buyers who have a lasting preference for its products or services over those offered by rivals,

despite the efforts of competitors to offset that appeal and overcome the company’s advantage. The bigger and more durable the competitive advantage, the better a com- pany’s prospects for winning in the marketplace and earning superior long-term prof- its relative to rivals.

The Importance of Capabilities in Building and Sustaining Competitive Advantage Winning a sustainable competitive edge over rivals with any of the previous five strat- egies generally hinges as much on building competitively valuable capabilities that rivals cannot readily match as it does on having a distinctive product offering. Clever rivals can nearly always copy the attributes of a popular product or service, but it is

CORE CONCEPT A company achieves sustainable competitive advantage when an attractively large number of buyers develop a durable preference for its products or services over the offerings of com- petitors, despite the efforts of competitors to overcome or erode its advantage.

Final PDF to printer

Chapter 1 Strategy, Business Models, and Competitive Advantage 7

gam27636_ch01_001-012.indd 7 01/09/18 07:38 PM

&

Since its founding in 1985 as a modest nine-store operation in Seattle, Washington, Starbucks had become the premier roaster and retailer of specialty coffees in the world, with nearly 25,000 store locations in 70 countries as of April 2016 and annual sales that exceed $21 billion in fiscal 2016. The key elements of Star- bucks’ strategy in specialty coffees included:

• Train “baristas” to serve a wide variety of specialty coffee drinks that allow customers to satisfy their individual pref- erences in a customized way. Starbucks essentially brought specialty coffees, such as cappuccinos, lattes, and macchiatos, to the mass market in the United States, encouraging custom- ers to personalize their coffee drinking habits. Requests for such items as a “Smoked Butterscotch Latte with Soy Milk” could be served up quickly with consistent quality.

• Emphasis on store ambience and elevating the customer experience at Starbucks stores. Starbucks management viewed each store as a billboard for the company and as a contributor to building the company’s brand and image. Each detail was scrutinized to enhance the mood and ambiance of the store to make sure everything signaled “best-of-class” and reflected the personality of the com- munity and the neighborhood. The thesis was “everything mattered.” The company went to great lengths to make sure the store fixtures, the merchandise displays, the col- ors, the artwork, the banners, the music, and the aromas all blended to create a consistent, inviting, stimulating environ- ment that evoked the romance of coffee, that signaled the company’s passion for coffee, and that rewarded customers with ceremony, stories, and surprise.

• Purchase and roast only top-quality coffee beans. The company purchased only the highest quality arabica beans and carefully roasted coffee to exacting standards of qual- ity and flavor. Starbucks did not use chemicals or artificial flavors when preparing its roasted coffees.

• Commitment to corporate responsibility. Starbucks was protective of the environment and contributed positively to

the communities where Starbucks stores were located. In addition, Starbucks promoted fair trade practices and paid above-market prices for coffee beans to provide its grow- ers/suppliers with sufficient funding to sustain their opera- tions and provide for their families.

• Expansion of the number of Starbucks stores domesti- cally and internationally. Starbucks operated stores in high-traffic, high-visibility locations in the United States and abroad. The company’s ability to vary store size and format made it possible to locate stores in settings such as downtown and suburban shopping areas, office build- ings, and university campuses. Starbucks added 321 new company-owned locations in the United States and another 155 company-owned stores internationally in fiscal 2016. Starbucks also added 330 licensed store locations in the United States and 1,236 licensed stores internationally in 2016. The company planned to open 12,000 new stores globally by fiscal 2021, with 3,400 new units being opened in the United States.

• Broaden and periodically refresh in-store product offer- ings. Noncoffee products offered by Starbucks included teas, fresh pastries and other food items, and coffee mugs and coffee accessories. The company’s new Mercato stores would extend food offerings to include grab-and-go salads and sandwiches and novel health-conscious items such as gluten-free smoked Canadian bacon breakfast sandwiches and Sous Vide Egg Bites.

• Fully exploit the growing power of the Starbucks name and brand image with out-of-store sales. Starbucks consumer packaged goods division included domestic and international sales of Frappuccino, coffee ice creams, and Starbucks coffees.

Sources: Company documents, 10-Ks, and information posted on Starbucks’ website.

STARBUCKS’ STRATEGY IN THE SPECIALTY COFFEE MARKET

Concepts Connections 1.2

substantially more difficult for rivals to match the know-how and specialized capabili- ties a company has developed and perfected over a long period. FedEx, for example, has superior capabilities in next-day delivery of small packages. And Hyundai has become the world’s fastest-growing automaker as a result of its advanced manufacturing pro- cesses and unparalleled quality control system. The capabilities of both of these com- panies have proven difficult for competitors to imitate or best and have allowed each to build and sustain competitive advantage.

Final PDF to printer

8 Part 1 Section A: Introduction and Overview

gam27636_ch01_001-012.indd 8 01/09/18 07:38 PM

Why a Company’s Strategy Evolves over Time

Understand that a company’s strategy tends to evolve over time because of changing circumstances and ongoing management efforts to improve the company’s strategy.

LO1-5

The appeal of a strategy that yields a sustainable competitive advantage is that it offers the potential for an enduring edge over rivals. However, managers of every company must be willing and ready to modify the strategy in response to the unexpected moves of competitors, shifting buyer needs and preferences, emerging market opportunities, new ideas for improving the strategy, and mounting evidence that the strategy is not work- ing well. Most of the time, a company’s strategy evolves incrementally as management fine-tunes various pieces of the strategy and adjusts the strategy to respond to unfold- ing events. However, on occasion, major strategy shifts are called for, such as when the strategy is clearly failing or when industry conditions change in dramatic ways.

Regardless of whether a company’s strategy changes gradually or swiftly, the important point is that the task of crafting strategy is not a one-time event but is always a work in prog-

ress.7 The evolving nature of a company’s strategy means the typical company strategy is a blend of (1) proactive moves to improve the company’s financial performance and secure a competitive edge and (2) adaptive reactions to unantici- pated developments and fresh market conditions—see Fig- ure 1.1.8 The biggest portion of a company’s current strategy flows from ongoing actions that have proven themselves in the marketplace and newly launched initiatives aimed at

building a larger lead over rivals and further boosting financial performance. This part of management’s action plan for running the company is its proactive, deliberate strategy.

At times, certain components of a company’s deliberate strategy will fail in the mar- ketplace and become abandoned strategy elements. Also, managers must always be willing to supplement or modify planned, deliberate strategy elements with as-needed

Changing circumstances and ongoing manage- ment efforts to improve the strategy cause a company’s strategy to evolve over time—a con- dition that makes the task of crafting a strategy a work in progress, not a one-time event.

Deliberate Strategy Elements

Emergent Strategy ElementsEmergent Strategy Elements

Planned new initiatives plus ongoing strategies continued

from prior periods

Unplanned reactive responses to changing circumstances

by management

Abandoned strategy elements

Realized Business Strategy

FIGURE 1.1 A Company’s Strategy Is a Blend of Planned Initiatives

and Unplanned Reactive Adjustments

Final PDF to printer

Chapter 1 Strategy, Business Models, and Competitive Advantage 9

gam27636_ch01_001-012.indd 9 01/09/18 07:38 PM

reactions to unanticipated developments. Inevitably, there will be occasions when mar- ket and competitive conditions take unexpected turns that call for some kind of strate- gic reaction. Novel strategic moves on the part of rival firms, unexpected shifts in customer preferences, fast- changing technological developments, and new market opportunities call for unplanned, reactive adjustments that form the company’s emergent strategy. As shown in Figure 1.1, a company’s realized strategy tends to be a combination of deliberate planned elements and unplanned, emergent elements.

The Three Tests of a Winning Strategy

Identify the three tests of a winning strategy.LO1-6

Three questions can be used to distinguish a winning strategy from a so-so or flawed strategy:

1. How well does the strategy fit the company’s situ- ation? To qualify as a winner, a strategy has to be well matched to the company’s external and internal situations. The strategy must fit competi- tive conditions in the industry and other aspects of the enterprise’s external environment. At the same time, it should be tailored to the company’s collection of competitively important resources and capabilities. It’s unwise to build a strategy upon the company’s weaknesses or pursue a strategic approach that requires resources that are defi- cient in the company. Unless a strategy exhibits a tight fit with both the external and internal aspects of a company’s overall situation, it is unlikely to produce respectable, first-rate business results.

2. Is the strategy helping the company achieve a sustainable competitive advantage? Strategies that fail to achieve a durable competitive advantage over rivals are unlikely to produce superior performance for more than a brief period of time. Winning strategies enable a company to achieve a competitive advantage over key rivals that is long lasting. The bigger and more durable the competitive edge that the strategy helps build, the more powerful it is.

3. Is the strategy producing good company performance? The mark of a winning strat- egy is strong company performance. Two kinds of performance improvements tell the most about the caliber of a company’s strategy: (1) gains in profitability and financial strength and (2) advances in the company’s competitive strength and market standing.

Strategies that come up short on one or more of these tests are plainly less appealing than strategies passing all three tests with flying colors. Managers should use the same questions when evaluating either proposed or existing strategies. New initiatives that don’t seem to match the company’s internal and external situation should be scrapped before they come to fruition, while existing strategies must be scrutinized on a regular

CORE CONCEPT A company’s realized strategy is a combination deliberate planned elements and unplanned emergent elements. Some components of a com- pany’s deliberate strategy will fail in the market- place and become abandoned strategy elements.

A winning strategy must fit the company’s exter- nal and internal situation, build sustainable competitive advantage, and improve company performance.

Final PDF to printer

10 Part 1 Section A: Introduction and Overview

gam27636_ch01_001-012.indd 10 01/09/18 07:38 PM

basis to ensure they have a good fit, offer a competitive advantage, and have contributed to above-average performance or performance improvements.

Why Crafting and Executing Strategy Are Important Tasks High-achieving enterprises are nearly always the product of astute, creative, and proac- tive strategy making. Companies don’t get to the top of the industry rankings or stay there with illogical strategies, copycat strategies, or timid attempts to try to do better. Among all the things managers do, nothing affects a company’s ultimate success or failure more fundamentally than how well its management team charts the company’s direction, develops competitively effective strategic moves and business approaches, and pursues what needs to be done internally to produce good day-in, day-out strategy execution and operating excellence. Indeed, good strategy and good strategy execution are the most telling signs of good management. The rationale for using the twin stan- dards of good strategy making and good strategy execution to determine whether a company is well managed is therefore compelling: The better conceived a company’s strategy and the more competently it is executed, the more likely that the company will be a standout performer in the marketplace. In stark contrast, a company that lacks clear-

cut direction, has a flawed strategy, or cannot execute its strategy competently is a company whose financial performance is probably suffering, whose business is at long-term risk, and whose management is sorely lacking.

The Road Ahead Throughout the chapters to come and the accompanying case collection, the spotlight is trained on the foremost question in running a business enterprise: What must man- agers do, and do well, to make a company a winner in the marketplace? The answer that emerges is that doing a good job of managing inherently requires good strategic think- ing and good management of the strategy-making, strategy-executing process.

The mission of this book is to provide a solid overview of what every business stu- dent and aspiring manager needs to know about crafting and executing strategy. We will explore what good strategic thinking entails, describe the core concepts and tools of strategic analysis, and examine the ins and outs of crafting and executing strategy. The accompanying cases will help build your skills in both diagnosing how well the strategy- making, strategy-executing task is being performed and prescribing actions for how the strategy in question or its execution can be improved. The strategic management course that you are enrolled in may also include a strategy simulation exercise where you will run a company in head-to-head competition with companies run by your classmates. Your mastery of the strategic management concepts presented in the following chapters will put you in a strong position to craft a winning strategy for your company and figure out how to execute it in a cost-effective and profitable manner. As you progress through the chapters of the text and the activities assigned during the term, we hope to convince you that first-rate capabilities in crafting and executing strategy are essential to good management.

How well a company performs is directly attrib- utable to the caliber of its strategy and the pro- ficiency with which the strategy is executed.

Final PDF to printer

Chapter 1 Strategy, Business Models, and Competitive Advantage 11

gam27636_ch01_001-012.indd 11 01/09/18 07:38 PM

KEY POINTS

1. A company’s strategy is the set of actions that its managers take to outperform the com- pany’s competitors and achieve superior profitability.

2. Closely related to the concept of strategy is the concept of a company’s business model. A com- pany’s business model is management’s blueprint for delivering customer value in a manner that will generate revenues sufficient to cover costs and yield an attractive profit. The two elements of a company’s business model are its (1) customer value proposition and (2) its profit formula.

3. The central thrust of a company’s strategy is undertaking moves to build and strengthen the company’s long-term competitive position and financial performance by competing differently from rivals and gaining a sustainable competitive advantage over them.

4. A company’s strategy typically evolves over time, arising from a blend of (1) proactive and deliberate actions on the part of company managers and (2) adaptive emergent responses to unanticipated developments and fresh market conditions.

5. A winning strategy fits the circumstances of a company’s external and internal situations, builds competitive advantage, and boosts company performance.

ASSURANCE OF LEARNING EXERCISES

1. Based on your experiences as a coffee consumer, does Starbucks’ strategy as described in Concepts & Connections 1.2 seem to set it apart from rivals? Does the strategy seem to be keyed to a cost-based advantage, differentiating features, serving the unique needs of a niche, or some combination of these? What is there about Starbucks’ strategy that can lead to sustainable competitive advantage?

2. Go to investor.siriusxm.com and check whether SiriusXM’s recent financial reports indicate that its business model is working. Are its subscription fees increasing or declining? Is its revenue stream from advertising and equipment sales growing or declining? Does its cost structure allow for acceptable profit margins?

3. Elements of eBay’s strategy have evolved in meaningful ways since the company’s founding in 1995. After reviewing the company’s history at www.ebayinc.com/our-company/our-history/ and all of the links at the company’s investor relations site (investors.ebayinc.com/), prepare a one- to two-page report that discusses how its strategy has evolved. Your report should also assess how well eBay’s strategy passes the three tests of a winning strategy.

EXERCISES FOR SIMULATION PARTICIPANTS

After you have read the Participant’s Guide or Player’s Manual for the strategy simulation exer- cise that you will participate in this academic term, you and your co-managers should come up with brief one- or two-paragraph answers to the questions that follow before entering your first set of decisions. While your answers to the first of the four questions can be developed from your reading of the manual, the remaining questions will require a collaborative discussion among the members of your company’s management team about how you intend to manage the company you have been assigned to run.

1. What is our company’s current situation? A substantive answer to this question should cover the following issues:

• Does your company appear to be in sound financial condition?

• What problems does your company have that need to be addressed?

LO1-1, LO1-2, LO1-4

LO1-5, LO1-6

LO1-3

LO1-6

Final PDF to printer

gam27636_ch01_001-012.indd 12 01/09/18 07:38 PM

12 Part 1 Section A: Introduction and Overview

2. Why will our company matter to customers? A complete answer to this question should say something about each of the following:

• How will you create customer value?

• What will be distinctive about the company’s products or services?

• How will capabilities and resources be deployed to deliver customer value?

3. What are the primary elements of your company’s business model?

• Describe your customer value proposition.

• Discuss the profit formula tied to your business model.

• What level of revenues is required for your company’s business model to become a moneymaker?

4. How will you build and sustain competitive advantage?

• Which of the basic strategic and competitive approaches discussed in this chapter do you think makes the most sense to pursue?

• What kind of competitive advantage over rivals will you try to achieve?

• How do you envision that your strategy might evolve as you react to the competitive moves of rival firms?

• Does your strategy have the ability to pass the three tests of a winning strategy? Explain.

LO1-2, LO1-4

LO1-3

LO1-4, LO1-5, LO1-6

1. B. R., “Strategy,” The Economist, October 19, 2012, www.economist.com/blogs/ schumpeter/2012/10/z-business- quotations-1 (accessed January 4, 2014).

2. Jan Rivkin, “An Alternative Approach to Making Strategic Choices,” Harvard Business School case 9-702-433, 2001.

3. Michael E. Porter, “What Is Strategy?” Harvard Business Review 74, no. 6 (November–December 1996).

4. Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann, “Reinventing Your Business Model,” Harvard Business Review 86, no. 12

(December 2008); and Joan Magretta, “Why Business Models Matter,” Harvard Business Review 80, no. 5 (May 2002).

5. W. Chan Kim and Renée Mauborgne, “How Strategy Shapes Structure,” Harvard Business Review 87, no. 9 (September 2009).

6. Porter, “What Is Strategy?”

7. Cynthia A. Montgomery, “Putting Leadership Back into Strategy,” Harvard Business Review 86, no. 1 (January 2008).

8. Henry Mintzberg and Joseph Lampel, “Reflecting on the Strategy Process,”

Sloan Management Review 40, no. 3 (Spring 1999); Henry Mintzberg and J. A. Waters, “Of Strategies, Deliberate and Emergent,” Strategic Management Journal 6 (1985); Costas Markides, “Strategy as Balance: From ‘Either-Or’ to ‘And,’” Business Strategy Review 12, no. 3 (September 2001); Henry Mintzberg, Bruce Ahlstrand, and Joseph Lampel, Strategy Safari: A Guided Tour Through the Wilds of Strategic Management (New York: Free Press, 1998); C. K. Prahalad and Gary Hamel, “The Core Competence of the Corporation,” Harvard Business Review 70, no. 3 (May–June 1990).

ENDNOTES

Final PDF to printer

13

gam27636_ch02_013-035.indd 13 01/09/18 07:39 PM

LEARNING OBJECTIVES

After reading this chapter, you should be able to:

LO2-1 Understand why it is critical for company managers to have a clear strategic vision of where a company needs to head and why.

LO2-2 Explain the importance of setting both strategic and financial objectives.

LO2-3 Explain why the strategic initiatives taken at various organizational levels must be tightly coordinated to achieve companywide performance targets.

LO2-4 Recognize what a company must do to achieve operating excellence and to execute its strategy proficiently.

LO2-5 Identify the role and responsibility of a company’s board of directors in overseeing the strategic management process.

2

c h

a p

te r

Strategy Formulation, Execution, and Governance

Final PDF to printer

gam27636_ch02_013-035.indd 14 01/09/18 07:39 PM

14 Part 1 Section A: Introduction and Overview

Crafting and executing strategy are the heart and soul of managing a business enterprise. But exactly what is involved in developing a strategy and executing it proficiently? What are the various components of the strategy formulation, strategy execution process, and to what extent are company personnel—aside from senior management—involved in the process? This chapter presents an overview of the ins and outs of crafting and executing company strategies. Special attention will be given to management’s direction-setting responsibilities—charting a strategic course, setting performance targets, and choosing a strategy capable of producing the desired outcomes. We will also explain why strategy formulation is a task for a company’s entire management team and discuss which kinds of strategic decisions tend to be made at which levels of management. The chapter concludes with a look at the roles and responsibilities of a company’s board of directors and how good corporate governance protects shareholder interests and promotes good management.

The Strategy Formulation, Strategy Execution Process The managerial process of crafting and executing a company’s strategy is an ongoing, continuous process consisting of five integrated stages:

1. Developing a strategic vision that charts the company’s long-term direction, a mis- sion statement that describes the company’s business, and a set of core values to guide the pursuit of the strategic vision and mission.

2. Setting objectives for measuring the company’s performance and tracking its prog- ress in moving in the intended long-term direction.

3. Crafting a strategy for advancing the company along the path to management’s envisioned future and achieving its performance objectives.

4. Implementing and executing the chosen strategy efficiently and effectively.

5. Evaluating and analyzing the external environment and the company’s internal situa- tion and performance to identify corrective adjustments that are needed in the com- pany’s long-term direction, objectives, strategy, or approach to strategy execution.

Figure 2.1 displays this five-stage process. The model illustrates the need for manage- ment to evaluate a number of external and internal factors in deciding upon a strate- gic direction, appropriate objectives, and approaches to crafting and executing strategy (see Table 2.1). Management’s decisions that are made in the strategic management process must be shaped by the prevailing economic conditions and competitive envi- ronment and the company’s own internal resources and competitive capabilities. These strategy-shaping conditions will be the focus of Chapters 3 and 4.

The model shown in Figure 2.1 also illustrates the need for management to evaluate the company’s performance on an ongoing basis. Any indication that the company is failing to achieve its objectives calls for corrective adjustments in one of the first four stages of the process. The company’s implementation efforts might have fallen short, and new tactics must be devised to fully exploit the potential of the company’s strategy. If management determines that the company’s execution efforts are sufficient, it should challenge the assumptions underlying the company’s business strategy and alter the strategy to better fit competitive conditions and the company’s internal capabilities. If

Final PDF to printer

Chapter 2 Strategy Formulation, Execution, and Governance 15

gam27636_ch02_013-035.indd 15 01/09/18 07:39 PM

TABLE 2.1

Factors Shaping Decisions in the Strategy Formulation, Strategy Execution Process

External Considerations • Does sticking with the company’s present strategic course present attractive opportunities for

growth and profitability? • What kind of competitive forces are industry members facing, and are they acting to enhance or

weaken the company’s prospects for growth and profitability? • What factors are driving industry change, and what impact on the company’s prospects will they

have? • How are industry rivals positioned, and what strategic moves are they likely to make next? • What are the key factors of future competitive success, and does the industry offer good prospects

for attractive profits for companies possessing those capabilities?

Internal Considerations • Does the company have an appealing customer value proposition? • What are the company’s competitively important resources and capabilities, and are they potent

enough to produce a sustainable competitive advantage? • Does the company have sufficient business and competitive strength to seize market opportunities

and nullify external threats? • Are the company’s costs competitive with those of key rivals? • Is the company competitively stronger or weaker than key rivals?

the company’s strategic approach to competition is rated as sound, then perhaps man- agement set overly ambitious targets for the company’s performance.

The evaluation stage of the strategic management process shown in Figure 2.1 also allows for a change in the company’s vision, but this should be necessary only when it

Stage 5Stage 1

Developing a strategic

vision, mission, and values

Stage 2

Setting objectives

Stage 3

Crafting a strategy to achieve the objectives

and move the company along

the intended path

Stage 4

Executing the strategy

External and Internal Factors Shaping Strategic and Operating Decisions

Evaluating and analyzing the

external environment

and the company’s internal situation

to identify corrective

adjustments

FIGURE 2.1 The Strategy Formulation, Strategy Execution Process

Final PDF to printer

gam27636_ch02_013-035.indd 16 01/09/18 07:39 PM

16 Part 1 Section A: Introduction and Overview

becomes evident to management that the industry has changed in a significant way that renders the vision obsolete. Such occasions can be referred to as strategic inflection points. When a company reaches a strategic inflection point, management has tough decisions to make about the company’s direction because abandoning an established course carries considerable risk. However, responding to unfolding changes in the mar- ketplace in a timely fashion lessens a company’s chances of becoming trapped in a stagnant or declining business or letting attractive new growth opportunities slip away.

The first three stages of the strategic management process make up a strategic plan. A strategic plan maps out where a company is headed, establishes strategic and finan- cial targets, and outlines the competitive moves and approaches to be used in achieving the desired business results.1

Stage 1: Developing a Strategic Vision, a Mission, and Core Values

Understand why it is critical for company managers to have a clear strategic vision of where a company needs to head and why.

LO2-1

At the outset of the strategy formulation, strategy execution process, a company’s senior managers must wrestle with the issue of what directional path the company should take and whether its market positioning and future performance prospects could be improved by changing the company’s product offerings and/or the markets in which it participates and/or the customers it caters to and/or the technologies it

employs. Top management’s views about the compa- ny’s direction and future product-customer-market- technology focus constitute a strategic vision for the company. A clearly articulated strategic vision commu- nicates management’s aspirations to stakeholders about “where we are going” and helps steer the ener- gies of company personnel in a common direction. For instance, the vision of Google’s co-founders Larry Page and Sergey Brin “to organize the world’s informa-

tion and make it universally accessible and useful” captured the imagination of Google employees, served as the basis for crafting the company’s strategic actions, and aided internal efforts to mobilize and direct the company’s resources.

Well-conceived visions are distinctive and specific to a particular organization; they avoid generic, feel-good statements such as “We will become a global leader and the first choice of customers in every market we choose to serve”—which could apply to any of hundreds of organizations.2 And they are not the product of a committee charged with coming up with an innocuous but well-meaning one-sentence vision that wins con- sensus approval from various stakeholders. Nicely worded vision statements with no specifics about the company’s product-market-customer-technology focus fall well short of what it takes for a vision to measure up.

For a strategic vision to function as a valuable managerial tool, it must provide under- standing of what management wants its business to look like and provide managers with a reference point in making strategic decisions. It must say something definitive

CORE CONCEPT A strategic vision describes “where we are going”—the course and direction management has charted and the company’s future product- customer-market-technology focus.

Final PDF to printer

Chapter 2 Strategy Formulation, Execution, and Governance 17

gam27636_ch02_013-035.indd 17 01/09/18 07:39 PM

about how the company’s leaders intend to position the company beyond where it is today. Table 2.2 lists some characteristics of effective vision statements.

A surprising number of the vision statements found on company websites and in annual reports are vague and unrevealing, saying very little about the company’s future product-market-customer-technology focus. Some could apply to most any company in any industry. Many read like a public relations statement—lofty words that someone came up with because it is fashionable for companies to have an official vision state- ment.3 Table 2.3 provides a list of the most common shortcomings in company vision statements. Like any tool, vision statements can be used properly or improperly, either clearly conveying a company’s strategic course or not. Concepts & Connections 2.1 provides a critique of the strategic visions of several prominent companies.

TABLE 2.2

Characteristics of Effectively Worded Vision Statements

Graphic—Paints a picture of the kind of company that management is trying to create and the market position(s) the company is striving to stake out Directional—Is forward-looking; describes the strategic course that management has charted and the kinds of product-market-customer-technology changes that will help the company prepare for the future Focused—Is specific enough to provide managers with guidance in making decisions and allocating resources Flexible—Is not so focused that it makes it difficult for management to adjust to changing circumstances in markets, customer preferences, or technology Feasible—Is within the realm of what the company can reasonably expect to achieve Desirable—Indicates why the directional path makes good business sense Easy to communicate—Is explainable in 5 to 10 minutes and, ideally, can be reduced to a simple, memorable “slogan” (like Henry Ford’s famous vision of “a car in every garage”)

Source: Based partly on John P. Kotter, Leading Change (Boston: Harvard Business School Press, 1996), p. 72.

TABLE 2.3

Common Shortcomings in Company Vision Statements

Vague or incomplete—Short on specifics about where the company is headed or what the company is doing to prepare for the future Not forward-looking—Does not indicate whether or how management intends to alter the company’s current product-market-customer-technology focus Too broad—So all-inclusive that the company could head in most any direction, pursue most any oppor- tunity, or enter most any business Bland or uninspiring—Lacks the power to motivate company personnel or inspire shareholder confi- dence about the company’s direction Not distinctive—Provides no unique company identity; could apply to companies in any of several industries (including rivals operating in the same market arena) Too reliant on superlatives—Does not say anything specific about the company’s strategic course beyond the pursuit of such distinctions as being a recognized leader, a global or worldwide leader, or the first choice of customers

Sources: Based on information in Hugh Davidson, The Committed Enterprise (Oxford: Butterworth Heinemann, 2002), chapter 2; and Michel Robert, Strategy Pure and Simple II (New York: McGraw-Hill, 1998), chapters 2, 3, and 6.

Final PDF to printer

gam27636_ch02_013-035.indd 18 01/09/18 07:39 PM

18 Part 1 Section A: Introduction and Overview

EXAMPLES OF STRATEGIC VISIONS—HOW WELL DO THEY MEASURE UP?

Vision Statement Effective Elements Shortcomings

Whole Foods Whole Foods Market is a dynamic leader in the quality food busi- ness. We are a mission-driven company that aims to set the stan- dards of excellence for food retailers. We are building a business in which high standards permeate all aspects of our company. Quality is a state of mind at Whole Foods Market. Our motto—Whole Foods, Whole People, Whole Planet—emphasizes that our vision reaches far beyond just being a food retailer. Our success in fulfilling our vision is measured by customer satisfaction, team member happiness and excellence, return on capital invest- ment, improvement in the state of the environment and local and larger community support. Our ability to instill a clear sense of interdependence among our various stakeholders (the people who are interested and benefit from the success of our company) is contingent upon our efforts to communicate more often, more openly, and more compassionately. Better communication equals better understanding and more trust.

• Forward-looking • Graphic • Focused • Desirable

• Long • Not memorable

Keurig Become the world’s leading personal beverage systems company. • Focused

• Flexible • Desirable

• Vague • Not graphic • Not forward-looking

Caterpillar Our vision is a world in which all people’s basic needs—such as shelter, clean water, sanitation, food and reliable power—are ful- filled in an environmentally sustainable way and a company that improves the quality of the environment and the communities where we live and work.

• Graphic • Desirable

• Too broad • Too reliant on

superlatives • Not distinctive

Nike NIKE, Inc., fosters a culture of invention. We create products, ser- vices and experiences for today’s athlete* while solving problems for the next generation. *If you have a body, you are an athlete.

• Forward-looking • Flexible

• Vague • Not focused • Too reliant on

superlatives

Sources: Company documents and websites.

&Concepts Connections 2.1

The Importance of Communicating the Strategic Vision A strategic vision has little value to the organization unless it’s effectively communi- cated down the line to lower-level managers and employees. It would be difficult for a vision statement to provide direction to decision makers and energize employees toward achieving long-term strategic intent unless they know of the vision and observe manage- ment’s commitment to that vision. Communicating the vision to organization members nearly always means putting “where we are going and why” in writing, distributing the statement organization-wide, and having executives personally explain the vision and its

Final PDF to printer

Chapter 2 Strategy Formulation, Execution, and Governance 19

gam27636_ch02_013-035.indd 19 01/09/18 07:39 PM

rationale to as many people as feasible. Ideally, executives should present their vision for the company in a manner that reaches out and grabs people’s attention. An engag- ing and convincing strategic vision has enormous motivational value—for the same rea- son that a stonemason is inspired by building a great cathedral for the ages. Therefore, an executive’s ability to paint a convincing and inspiring picture of a company’s journey to a future destination is an important element of effective strategic leadership.4

Expressing the Essence of the Vision in a Slogan The task of effectively convey- ing the vision to company personnel is assisted when management can capture the vision of where to head in a catchy or easily remembered slogan. A number of organizations have summed up their vision in a brief phrase. Disney’s overarching vision for its five business groups—theme parks, movie studios, television channels, consumer products, and interactive media entertainment— is to “create happiness by providing the finest in entertain- ment for people of all ages, everywhere.” The Mayo Clinic’s vision is to provide “The best care to every patient every day,” while Greenpeace’s envisioned future is “To halt envi- ronmental abuse and promote environmental solutions.” Creating a short slogan to illuminate an organization’s direction and then using it repeatedly as a reminder of “where we are headed and why” helps rally organization members to hurdle whatever obstacles lie in the company’s path and maintain their focus.

Why a Sound, Well-Communicated Strategic Vision Matters A well- thought-out, forcefully communicated strategic vision pays off in several respects: (1) it crystallizes senior executives’ own views about the firm’s long-term direction; (2) it reduces the risk of rudderless decision making by management at all levels; (3) it is a tool for winning the support of employees to help make the vision a reality; (4) it pro- vides a beacon for lower-level managers in forming departmental missions; and (5) it helps an organization prepare for the future.

Developing a Company Mission Statement The defining characteristic of a well-conceived strategic vision is what it says about the company’s future strategic course—“where we are headed and what our future product- customer-market-technology focus will be.” In contrast, a mis- sion statement describes the enterprise’s present business scope and purpose—“who we are, what we do, and why we are here.” It is purely descriptive. Ideally, a company mis- sion statement (1) identifies the company’s products and/ or services, (2) specifies the buyer needs that the company seeks to satisfy and the customer groups or markets that it serves, and (3) gives the company its own identity. Con- sider, for example, the mission statement of Singapore Air- lines, which is consistently rated among the world’s best airlines in terms of passenger safety and comfort:

Singapore Airlines is a global company dedicated to pro- viding air transportation services of the highest quality and to maximizing returns for the benefit of its shareholders and employees.

An effectively communicated vision is a valuable management tool for enlisting the commitment of company personnel to engage in actions that move the company in the intended direction.

The distinction between a strategic vision and a mission statement is fairly clear-cut: A strategic vision portrays a company’s future business scope (“where we are going”), whereas a company’s mis- sion statement typically describes its present busi- ness and purpose (“who we are, what we do, and why we are here”).

CORE CONCEPT A well-conceived mission statement conveys a company’s purpose in language specific enough to give the company its own identity.

Final PDF to printer

gam27636_ch02_013-035.indd 20 01/09/18 07:39 PM

20 Part 1 Section A: Introduction and Overview

Note that Singapore Airlines’ mission statement does a good job of conveying “who we are, what we do, and why we are here,” but it provides no sense of “where we are headed.”

An example of a well-stated mission statement with ample specifics about what the organization does is that of St. Jude Children’s Research Hospital: “to advance cures, and means of prevention, for pediatric catastrophic diseases through research and treatment. Consistent with the vision of our founder Danny Thomas, no child is denied treatment based on race, religion or a family’s ability to pay.” Twitter’s mission statement, while short, still captures the essence of what the company is about: “to give everyone the power to create and share ideas and information instantly, without barriers.” An example of a not-so-revealing mission statement is that of Microsoft. “To empower every person and every organization on the planet to achieve more” says nothing about its products or busi- ness and does not give the company its own identity. A mission statement that provides scant indication of “who we are and what we do” has no apparent value.

Occasionally, companies state that their mission is to simply earn a profit. This is misguided. Profit is more correctly an objective and a result of what a company does. Moreover, earning a profit is the obvious intent of every commercial enterprise. Such companies as BMW, Netflix, Shell Oil, Procter & Gamble, and Citigroup are each striv- ing to earn a profit for shareholders, but the fundamentals of their businesses are sub- stantially different when it comes to “who we are and what we do.” It is management’s answer to “make a profit doing what and for whom?” that reveals the substance of a company’s true mission and business purpose.

Linking the Strategic Vision and Mission with Company Values Many companies have developed a statement of values (sometimes called core values) to guide the actions and behavior of company personnel in conducting the company’s business and pursuing its strategic vision and mission. These values are the designated

beliefs and desired ways of doing things at the company and frequently relate to such things as fair treatment, honor and integrity, ethical behavior, innovativeness, teamwork, a passion for excellence, social responsibility, and community citizenship.

Most companies normally have four to eight core values. At Samsung, five core values are linked to its philosophy of devoting its talent and technology to cre- ate superior products and services that contribute to a

better global society: (1) giving people opportunities to reach their full potential, (2) developing the best products and services on the market, (3) embracing change, (4) operating in an ethical way, and (5) dedication to social and environmental respon- sibility. L. L. Bean’s two core values are encompassed in a quote from founder Leon Leonwood Bean—“Sell good merchandise at a reasonable profit, treat your customers like human beings, and they will always come back for more.”

Do companies practice what they preach when it comes to their professed values? Sometimes no, sometimes yes—it runs the gamut. At one extreme are companies with window-dressing values; the professed values are given lip service by top executives but have little discernible impact on either how company personnel behave or how the company operates. At the other extreme are companies whose executives are commit- ted to grounding company operations on sound values and principled ways of doing

CORE CONCEPT A company’s values are the beliefs, traits, and behavioral norms that company personnel are expected to display in conducting the compa- ny’s business and pursuing its strategic vision and mission.

Final PDF to printer

Chapter 2 Strategy Formulation, Execution, and Governance 21

gam27636_ch02_013-035.indd 21 01/09/18 07:39 PM

PATAGONIA, INC.: A VALUES-DRIVEN COMPANY

PATAGONIA’S MISSION STATEMENT Build the best product, cause no unnecessary harm, use business to inspire, and implement solutions to the envi- ronmental crisis.

PATAGONIA’S CORE VALUES Quality: Pursuit of ever-greater quality in everything we do.

Integrity: Relationships built on integrity and respect.

Environmentalism: Serve as a catalyst for personal and corporate action.

Not Bound by Convention: Our success—and much of the fun—lies in developing innovative ways to do things.

Patagonia, Inc., is an American outdoor clothing and gear company that clearly “walks the talk” with respect to its mis- sion and values. While its mission is relatively vague about the types of products Patagonia offers, it clearly states the foundational “how” and “why” of the company. The four core values individually reinforce the mission in distinct ways, charting a defined path for employees to follow. At the same time, each value is reliant on the others for maximum effect. The values’ combined impact on internal operations and

public perception has made Patagonia a strong leader in the outdoor gear world.

While many companies espouse the pursuit of quality as part of their strategy, at Patagonia quality must come through honorable practices or not at all. Routinely, the company opts for more expensive materials and labor to maintain internal consis- tency with the mission. Patagonia learned early on that it could not make good products in bad factories, so it holds its manu- facturers accountable through a variety of auditing partnerships and alliances. In this way, the company maintains relationships built on integrity and respect. In addition to keeping faith with those who make its products, Patagonia relentlessly pursues integrity in sourcing production inputs. Central to its environ- mental mission and core values, it targets for use sustainable and recyclable materials, ethically procured. Demonstrating leadership in environmentalism, Patagonia established founda- tions to support ecological causes, even defying convention by giving one percent of profits to conservation causes. These are but a few examples of the ways in which Patagonia’s core values fortify each other and support the mission.

For Patagonia, quality would not be possible without integ- rity, unflinching environmentalism, and the company’s uncon-

ventional approach. Since its founding in 1973 by rock climber Yvon Chouinard, Patagonia has remained remarkably consistent to the spirit of these values. This has endeared the company to legions of loyal customers while leading other businesses in protecting the environment. More than an apparel and gear company, Patagonia inspires everyone it touches to do their best for the planet and each other, in line with its mission and core values.

Note: Developed with Nicholas J. Ziemba.

Sources: Patagonia, Inc., “Corporate Social Responsibil- ity,” The Footprint Chronicles, 2007, and “Becoming a Responsible Company,” www.patagonia.com/us/ patagonia.go?assetid=2329 (accessed February 28, 2014).

&Concepts Connections 2.2

©George Frey/Getty Images

business. Executives at these companies deliberately seek to ingrain the designated core values into the corporate culture—the core values thus become an integral part of the company’s DNA and what makes it tick. At such values-driven companies, executives “walk the talk” and company personnel are held accountable for displaying the stated values. Concepts & Connections 2.2 describes how core values drive the

Final PDF to printer

gam27636_ch02_013-035.indd 22 01/09/18 07:39 PM

22 Part 1 Section A: Introduction and Overview

company’s mission at Patagonia, a widely known and quite successful outdoor cloth- ing and gear company.

Stage 2: Setting Objectives

Explain the importance of setting both strategic and financial objectives.LO2-2

The managerial purpose of setting objectives is to convert the strategic vision into spe- cific performance targets. Objectives reflect management’s aspirations for company performance in light of the industry’s prevailing economic and competitive conditions and the company’s internal capabilities. Well-stated objectives are quantifiable, or mea- surable, and contain a deadline for achievement. Concrete, measurable objectives are managerially valuable for three reasons: (1) They focus organizational attention and align actions throughout the organization, (2) they serve as yardsticks for tracking a company’s performance and progress, and (3) they motivate employees to expend greater effort and perform at a high level.

The Imperative of Setting Stretch Objectives The experiences of countless companies teach that one of the best ways to promote outstanding company performance is for managers to deliberately set performance tar- gets high enough to stretch an organization to perform at its full potential. Challenging company personnel to go all out and deliver “stretch” gains in performance pushes an enterprise to be more inventive and to exhibit more urgency in improving its financial performance and business position. Stretch objectives spur exceptional performance and help build a firewall against contentment with modest gains in organizational performance.

A company exhibits strategic intent when it relentlessly pursues an ambitious strate- gic objective, concentrating the full force of its resources and competitive actions on achieving that objective. Both Google (now Alphabet) and Amazon have had the stra- tegic intent of developing drones, Amazon’s for delivery and Google’s for both delivery

and high-speed Internet delivery from the skies. Elon Musk, CEO of both Tesla Motors and SpaceX, is well- known for his ambitious stretch goals and strategic intent. In 2016, he said that his commercial flight pro- gram, SpaceX, should be ready to send people to Mars in 10 years.

What Kinds of Objectives to Set Two very distinct types of performance yardsticks are required: those relating to financial performance and those relating to strategic performance. Financial objec- tives communicate management’s targets for financial performance. Common financial objectives relate to revenue growth, profitability, and return on invest- ment. Strategic objectives are related to a company’s

CORE CONCEPT Objectives are an organization’s performance targets—the results management wants to achieve.

Stretch objectives set performance targets high enough to stretch an organization to per- form at its full potential and deliver the best possible results.

A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and competitive actions on achiev- ing that objective.

Final PDF to printer

Chapter 2 Strategy Formulation, Execution, and Governance 23

gam27636_ch02_013-035.indd 23 01/09/18 07:39 PM

marketing standing and competitive vitality. The impor- tance of attaining financial objectives is intuitive. Without adequate profitability and financial strength, a company’s long-term health and ultimate survival is jeopardized. Furthermore, subpar earnings and a weak balance sheet alarm shareholders and creditors and put the jobs of senior executives at risk. However, good financial performance, by itself, is not enough.

A company’s financial objectives are really lagging indicators that reflect the results of past decisions and organizational activities.5 The results of past deci- sions and organizational activities are not reliable indicators of a company’s future prospects. Companies that have been poor financial performers are sometimes able to turn things around, and good financial performers on occasion fall upon hard times. Hence, the best and most reliable predictors of a company’s success in the marketplace and future financial performance are strategic objectives. Strategic outcomes are leading indicators of a company’s future financial performance and business prospects. The accomplishment of strategic objectives signals the company is well positioned to sustain or improve its performance. For instance, if a company is achieving ambitious strategic objectives, then there’s reason to expect that its future financial performance will be better than its current or past performance. If a company begins to lose competitive strength and fails to achieve important strategic objectives, then its ability to maintain its present profitability is highly suspect.

Consequently, utilizing a performance measurement system that strikes a balance between financial objectives and strategic objectives is optimal.6 Just tracking a com- pany’s financial performance overlooks the fact that what ultimately enables a company to deliver better financial results is the achievement of strategic objectives that improve its competitive- ness and market strength. Representative examples of financial and strategic objectives that companies often include in a balanced scorecard approach to measuring their performance are displayed in Table 2.4.7

In 2015, nearly 50 percent of global companies used a balanced scorecard approach to measuring strategic and financial performance.8 Examples of organizations that have adopted a balanced scorecard approach to setting objectives and measuring performance include Siemens AG, Wells Fargo Bank, Ann Taylor Stores, Ford Motor Company, Hilton Hotels, and over 30 colleges and universities.9 Concepts & Connections 2.3 provides selected strategic and financial objectives of three promi- nent companies.

Short-Term and Long-Term Objectives A company’s set of financial and strategic objectives should include both near-term and long-term performance tar- gets. Short-term objectives focus attention on delivering performance improvements in the current period, whereas long-term targets force the organization to consider

CORE CONCEPT Financial objectives relate to the financial perfor- mance targets management has established for the organization to achieve.

Strategic objectives relate to target outcomes that indicate a company is strengthening its mar- ket standing, competitive vitality, and future busi- ness prospects.

CORE CONCEPT The balanced scorecard is a widely used method for combining the use of both strategic and financial objectives, tracking their achievement, and giving management a more complete and balanced view of how well an organization is performing.

Final PDF to printer

gam27636_ch02_013-035.indd 24 01/09/18 07:39 PM

24 Part 1 Section A: Introduction and Overview

TABLE 2.4

The Balanced Scorecard Approach to Performance Measurement

Financial Objectives • An x percent increase in annual revenues • Annual increases in earnings per share of x percent • An x percent return on capital employed (ROCE) or shareholder investment (ROE) • Bond and credit ratings of x • Internal cash flows of x to fund new capital investment

Strategic Objectives • Win an x percent market share • Achieve customer satisfaction rates of x percent • Achieve a customer retention rate of x percent • Acquire x number of new customers • Introduce x number of new products in the next three years • Reduce product development times to x months • Increase percentage of sales coming from new products to x percent • Improve information systems capabilities to give frontline managers defect information in x

minutes • Improve teamwork by increasing the number of projects involving more than one business unit

to x

EXAMPLES OF COMPANY OBJECTIVES

UPS Increase percentage of business-to-consumer package deliver- ies from 46 percent of domestic deliveries in 2014 to 51 percent of domestic deliveries in 2019; increase intraregional export shipments from 66 percent of exported packages in 2014 to 70 percent of exported packages in 2019; lower U.S. domes- tic average cost per package by 40 basis points between 2014 and 2019; increase total revenue from $58.2 billion in 2014 to $74.3–$81.6 billion in 2019; increase total operating profit from $4.95 billion in 2014 to $7.62–$9.12 billion by 2019; increase capital expenditures from 4 percent of revenues in 2014 to 5 percent of revenues in 2019.

FIAT CHRYSLER AUTOMOBILES Localize production of Jeep vehicles in all geographic regions by 2018; revive Alfa Romeo distinctive brand with new models; increase platform sharing between Chrysler and Fiat brands; increase total vehicle sales in the U.S. and NAFTA region from 19.9 million in 2014 to 21.1 million in 2018; increase total vehicle sales in Asia Pacific and China from 27.6 million in 2014 to 33.4 million in 2018; increase total vehicle sales in Europe, Middle East and

Africa from 21.4 million in 2014 to 24.2 million in 2018; increase adjusted EBIT from €3.2 billion in 2013 to €8.7 billion–€9.8 billion in 2018; increase adjusted net profit from €0.7 billion in 2013 to €4.7 billion–€5.5 billion in 2018.

YUM! BRANDS (KFC, PIZZA HUT, TACO BELL) Decrease unit ownership by 70 percent from 2016 to achieve 98 percent franchise ownership by 2018; reduce annual capital expenditures from $973 million in 2015 to $100 million by 2019; achieve 70 percent increase in EPS from $2.20 in 2015 to $3.75 in 2019; add 1,000 new Taco Bell units in the United States by 2020; increase Taco Bell revenues from $7 billion in 2012 to $14 billion in 2022; achieve #2 ranking in quick service chicken in Western Europe, the United Kingdom, and Australia; expand the number of Pizza Hut locations in China by 300 percent by 2020; expand digital ordering options in all quick service concepts; increase the number of restaurant locations in India from 705 in 2013 to 2,000 by 2020.

Source: Information posted on company websites.

&Concepts Connections 2.3

Final PDF to printer

Chapter 2 Strategy Formulation, Execution, and Governance 25

gam27636_ch02_013-035.indd 25 01/09/18 07:39 PM

how actions currently under way will affect the company later. Specifically, long-term objectives stand as a barrier to an undue focus on short-term results by nearsighted management. When trade-offs have to be made between achieving long-run and short- run objectives, long-run objectives should take precedence (unless the achievement of one or more short-run performance targets has unique importance).

The Need for Objectives at All Organizational Levels Objective setting should not stop with the establishment of companywide performance targets. Com- pany objectives need to be broken into performance targets for each of the organiza- tion’s separate businesses, product lines, functional departments, and individual work units. Employees within various functional areas and operating levels will be guided much better by narrow objectives relating directly to their departmental activities than broad organizational-level goals. Objective setting is thus a top-down process that must extend to the lowest organizational levels. And it means that each organizational unit must take care to set performance targets that support—rather than conflict with or negate—the achievement of companywide strategic and financial objectives.

Stage 3: Crafting a Strategy

Explain why the strategic initiatives taken at various organizational levels must be tightly coordinated to achieve companywide performance targets.

LO2-3

As indicated earlier, the task of stitching a strategy together entails addressing a series of hows: how to attract and please customers, how to compete against rivals, how to position the company in the marketplace and capitalize on attractive opportunities to grow the business, how best to respond to changing economic and market conditions, how to manage each functional piece of the business, and how to achieve the company’s performance targets. It also means choosing among the various strategic alternatives and proactively searching for opportunities to do new things or to do existing things in new or better ways.10

In choosing among opportunities and addressing the hows of strategy, strategists must embrace the risks of uncertainty and the discomfort that naturally accompanies such risks. Bold strategies involve making difficult choices and placing bets on the future. Good strategic planning is not about eliminating risks, but increasing the odds of success. In sorting through the possibilities of what the company should and should not do, managers may conclude some opportunities are unrealistic or not sufficiently attractive to pursue. However, innovative strategy making that results in a powerful cus- tomer value proposition or pushes the company into new markets will likely require the development of new resources and capabilities and force the company outside its comfort zone.11

Strategy Formulation Involves Managers at All Organizational Levels In some enterprises, the CEO or owner functions as strategic visionary and chief archi- tect of the strategy, personally deciding what the key elements of the company’s strat- egy will be, although the CEO may seek the advice of key subordinates in fashioning

Final PDF to printer

gam27636_ch02_013-035.indd 26 01/09/18 07:39 PM

26 Part 1 Section A: Introduction and Overview

In most companies, crafting strategy is a collab- orative team effort that includes managers in various positions and at various organizational levels. Crafting strategy is rarely something only high-level executives do.

Corporate strategy establishes an overall game plan for managing a set of businesses in a diversified, multibusiness company.

Business strategy is primarily concerned with strengthening the company’s market position and building competitive advantage in a single- business company or a single business unit of a diversified multibusiness corporation.

an overall strategy and deciding on important strategic moves. However, it is a mistake to view strategy making as a top management function—the exclusive province of owner-entrepreneurs, CEOs, high-ranking executives, and board members. The more a company’s operations cut across different products, industries, and geographi- cal areas, the more that headquarters executives have

little option but to delegate considerable strategy-making authority to down-the-line managers. On-the-scene managers who oversee specific operating units are likely to have a more detailed command of the strategic issues and choices for the particular operating unit under their supervision—knowing the prevailing market and competitive conditions, customer requirements and expectations, and all the other relevant aspects affecting the several strategic options available.

A Company’s Strategy-Making Hierarchy The larger and more diverse the operations of an enterprise, the more points of stra- tegic initiative it will have and the more managers at different organizational levels will have a relevant strategy-making role. In diversified companies, where multiple and sometimes strikingly different businesses have to be managed, crafting a full-fledged strategy involves four distinct types of strategic actions and initiatives, each undertaken at different levels of the organization and partially or wholly crafted by managers at different organizational levels, as shown in Figure 2.2. A company’s overall strategy is therefore a collection of strategic initiatives and actions devised by managers up and down the whole organizational hierarchy. Ideally, the pieces of a company’s strategy up and down the strategy hierarchy should be cohesive and mutually reinforcing, fitting together like a jigsaw puzzle.

As shown in Figure 2.2, corporate strategy is orchestrated by the CEO and other senior executives and establishes an overall game plan for managing a set of businesses in a diversified, multibusiness company. Corporate strategy addresses the questions of how to capture cross-business synergies, what businesses to hold or divest, which new markets to enter, and how to best enter new markets—by acquisition, by creation of a strategic alliance, or through internal development. Corporate strategy and business diversification are the subject of Chapter 8, where they are discussed in detail.

Business strategy is primarily concerned with building competitive advantage in a single business unit of a diversified company or strengthening the market position of a nondiversified single business company. Business strategy is also the responsibil- ity of the CEO and other senior executives, but key business-unit heads may also be

influential, especially in strategic decisions affecting the businesses they lead. In single-business companies, the corporate and business levels of the strategy-making hier- archy merge into a single level—business strategy—because the strategy for the entire enterprise involves only one distinct business. So, a single-business company has three levels of strategy: business strategy, functional-area strategies, and operating strategies.

Functional-area strategies concern the actions related to particular functions or processes within a business.

Final PDF to printer

Chapter 2 Strategy Formulation, Execution, and Governance 27

gam27636_ch02_013-035.indd 27 01/09/18 07:39 PM

A company’s product development strategy, for example, represents the managerial game plan for creating new products that are in tune with what buyers are looking for. Lead responsibility for functional strategies within a business is normally delegated to the heads of the respective functions, with the general manager of the business hav- ing final approval over functional strategies. For the overall business strategy to have maximum impact, a company’s marketing strategy, production strategy, finance strat- egy, customer service strategy, product development strategy, and human resources strategy should be compatible and mutually reinforcing rather than each serving its own narrower purpose.

Operating strategies concern the relatively narrow strategic initiatives and approaches for managing key operating units (plants, distribution centers, geographic units) and specific operating activities such as materials purchasing or Internet sales. Operating strategies are limited in scope but add further detail to functional-area strategies and the overall business strategy. Lead responsibility for operating strate- gies is usually delegated to frontline managers, subject to review and approval by higher-ranking managers.

Two-Way Influence

Two-Way Influence

Orchestrated by the CEO and senior executives of a business, often with advice and input from the heads of functional-area activities within the business and other key people

Orchestrated by brand managers; the operating managers of plants, distribution centers, and geographic units; and the managers of strategically important activities such as advertising and website operations, often in collaboration with other key people

Orchestrated by the heads of major functional activities within a business, often in collaboration with other key people

Business Strategy • How to strengthen market position and gain competitive advantage

• Actions to build competitive capabilities

Functional-Area Strategies

• Add relevant detail to the hows of overall business strategy

• Provide a game plan for managing a particular activity in ways that support the overall business strategy

Operating Strategies • Add detail and completeness to business and functional strategy • Provide a game plan for managing specific lower-echelon activities with strategic significance

Orchestrated by the CEO and other senior executives

In the case of a single-business company, these two levels of the strategy-making pyramid merge into one level— business strategy—that is orchestrated by the company’s CEO and other top executives

The overall companywide game plan for a managing a

set of businesses

Corporate Strategy

Two-Way Influence

FIGURE 2.2 A Company’s Strategy-Making Hierarchy

Final PDF to printer

gam27636_ch02_013-035.indd 28 01/09/18 07:39 PM

28 Part 1 Section A: Introduction and Overview

Stage 4: Implementing and Executing the Chosen Strategy

Recognize what a company must do to achieve operating excellence and to execute its strategy proficiently.

LO2-4

Managing the implementation and execution of strategy is easily the most demanding and time-consuming part of the strategic management process. Good strategy execution entails that managers pay careful attention to how key internal business processes are performed and see to it that employees’ efforts are directed toward the accomplishment of desired operational outcomes. The task of implementing and executing the strategy also necessitates an ongoing analysis of the efficiency and effectiveness of a company’s internal activities and a managerial awareness of new technological developments that might improve business processes. In most situations, managing the strategy execution process includes the following principal aspects:

• Staffing the organization to provide needed skills and expertise.

• Allocating ample resources to activities critical to good strategy execution.

• Ensuring that policies and procedures facilitate rather than impede effective execution.

• Installing information and operating systems that enable company personnel to perform essential activities.

• Pushing for continuous improvement in how value chain activities are performed.

• Tying rewards and incentives directly to the achievement of performance objectives.

• Creating a company culture and work climate conducive to successful strategy execution.

• Exerting the internal leadership needed to propel implementation forward.

Stage 5: Evaluating Performance and Initiating Corrective Adjustments The fifth stage of the strategy management process—evaluating and analyzing the exter- nal environment and the company’s internal situation and performance to identify needed corrective adjustments—is the trigger point for deciding whether to continue or change the company’s vision, objectives, strategy, and/or strategy execution meth- ods. So long as the company’s direction and strategy seem well matched to industry and competitive conditions and performance targets are being met, company execu-

tives may well decide to stay the course. Simply fine- tuning the strategic plan and continuing with efforts to improve strategy execution are sufficient.

But whenever a company encounters disruptive changes in its environment, questions need to be raised about the appropriateness of its direction and strategy.

A company’s vision, objectives, strategy, and approach to strategy execution are never final; managing strategy is an ongoing process, not an every-now-and-then task.

Final PDF to printer

Chapter 2 Strategy Formulation, Execution, and Governance 29

gam27636_ch02_013-035.indd 29 01/09/18 07:39 PM

If a company experiences a downturn in its market position or persistent shortfalls in performance, then company managers are obligated to ferret out the causes—do they relate to poor strategy, poor strategy execution, or both?—and take timely corrective action. A company’s direction, objectives, and strategy have to be revisited any time external or internal conditions warrant.

Also, it is not unusual for a company to find that one or more aspects of its strategy implementation and execution are not going as well as intended. Proficient strategy exe- cution is always the product of much organizational learning. It is achieved unevenly— coming quickly in some areas and proving nettlesome in others. Successful strategy execution entails vigilantly searching for ways to improve and then making corrective adjustments whenever and wherever it is useful to do so.

Corporate Governance: The Role of the Board of Directors in the Strategy Formulation, Strategy Execution Process Although senior managers have lead responsibility for crafting and executing a com- pany’s strategy, it is the duty of the board of directors to exercise strong oversight and see that the five tasks of strategic management are done in a manner that benefits shareholders (in the case of investor-owned enterprises) or stakeholders (in the case of not-for-profit organizations). In watching over management’s strategy formulation, strategy execution actions, a company’s board of directors has four important corporate governance obligations to fulfill:

Identify the role and responsibility of a company’s board of directors in overseeing the strategic management process.

LO2-5

1. Oversee the company’s financial accounting and financial reporting practices. While top management, particularly the company’s CEO and CFO (chief financial offi- cer), is primarily responsible for seeing that the company’s financial statements accurately report the results of the company’s operations, board members have a fiduciary duty to protect shareholders by exercising oversight of the company’s financial practices. In addition, corporate boards must ensure that generally acceptable accounting principles (GAAP) are properly used in preparing the company’s financial statements and determine whether proper financial controls are in place to prevent fraud and misuse of funds. Virtually all boards of directors monitor the financial reporting activities by appointing an audit committee, always composed entirely of outside directors (inside directors hold management positions in the company and either directly or indirectly report to the CEO). The members of the audit committee have lead responsibility for overseeing the decisions of the company’s financial officers and consulting with both internal and external audi- tors to ensure that financial reports are accurate and adequate financial controls are in place.

2. Diligently critique and oversee the company’s direction, strategy, and business approaches. Even though board members have a legal obligation to warrant the

Final PDF to printer

gam27636_ch02_013-035.indd 30 01/09/18 07:39 PM

30 Part 1 Section A: Introduction and Overview

accuracy of the company’s financial reports, directors must set aside time to guide management in choosing a strategic direction and to make independent judgments about the validity and wisdom of management’s proposed strategic actions. Many boards have found that meeting agendas become consumed by compliance matters and little time is left to discuss matters of strategic importance. The board of direc- tors and management at Philips Electronics hold annual two- to three-day retreats devoted to evaluating the company’s long-term direction and various strategic proposals. The company’s exit from the semiconductor business and its increased focus on medical technology and home health care resulted from management– board discussions during such retreats.12

3. Evaluate the caliber of senior executives’ strategy formulation and strategy execution skills. The board is always responsible for determining whether the current CEO is doing a good job of strategic leadership and whether senior management is actively creating a pool of potential successors to the CEO and other top execu- tives.13 Evaluation of senior executives’ strategy formulation and strategy execution skills is enhanced when outside directors go into the field to personally evalu- ate how well the strategy is being executed. Independent board members at GE visit operating executives at each major business unit once per year to assess the company’s talent pool and stay abreast of emerging strategic and operating issues affecting the company’s divisions. Home Depot board members visit a store once per quarter to determine the health of the company’s operations.14

4. Institute a compensation plan for top executives that rewards them for actions and results that serve shareholder interests. A basic principle of corporate governance is that the owners of a corporation delegate operating authority and managerial control to top management in return for compensation. In their role as an agent of shareholders, top executives have a clear and unequivocal duty to make decisions and operate the company in accord with shareholder interests (but this does not mean disregarding the interests of other stakeholders, particularly those of employ- ees, with whom they also have an agency relationship). Most boards of directors have a compensation committee, composed entirely of directors from outside the company, to develop a salary and incentive compensation plan that rewards senior executives for boosting the company’s long-term performance and growing the eco- nomic value of the enterprise on behalf of shareholders; the compensation com- mittee’s recommendations are presented to the full board for approval.

But during the past 10 to 15 years, many boards of directors have done a poor job of ensuring that executive salary increases, bonuses, and stock option awards are tied tightly to performance measures that are truly in the long-term interests of share- holders. Rather, compensation packages at many companies have rewarded execu- tives for short-term performance improvements—most notably, achieving quarterly and annual earnings targets and boosting the stock price by specified percentages. This has had the perverse effect of causing company managers to become preoccupied with actions to improve a company’s near-term performance, even if excessively risky and damaging to long-term company performance. As a consequence, the need to overhaul and reform executive compensation has become a hot topic in both pub- lic circles and corporate boardrooms. Concepts & Connections 2.4 discusses how weak governance at Volkswagen contributed to the 2015 emissions cheating scandal, which cost the company billions of dollars and the trust of its stakeholders.

Final PDF to printer

Chapter 2 Strategy Formulation, Execution, and Governance 31

gam27636_ch02_013-035.indd 31 01/09/18 07:39 PM

Every corporation should have a strong, independent board of directors that (1) is well informed about the company’s performance, (2) guides and judges the CEO and other top executives, (3) has the courage to curb management actions it believes are inappropriate or unduly risky, (4) certifies to shareholders that the CEO is doing

CORPORATE GOVERNANCE FAILURES AT VOLKSWAGEN In 2015, Volkswagen admitted to installing “defeat devices” on at least 11 million vehicles with diesel engines. These devices enabled the cars to pass emission tests, even though the engines actually emitted pollutants up to 40 times above what is allowed in the United States. Current estimates are that it will cost the com- pany at least €7 billion to cover the cost of repairs and lawsuits. Although management must have been involved in approving the use of cheating devices, the Volkswagen supervisory board has been unwilling to accept any responsibility. Some board members even questioned whether it was the board’s responsibility to be aware of such problems, stating “matters of technical expertise were not for us” and “the scandal had nothing, not one iota, to do with the advisory board.” Yet governing boards do have a respon- sibility to be well informed, to provide oversight, and to become involved in key decisions and actions. So what caused this corpo- rate governance failure? Why is this the third time in the past 20 years that Volkswagen has been embroiled in scandal?

The key feature of Volkswagen’s board that appears to have led to these issues is a lack of independent directors. However, before explaining this in more detail it is important to understand the German governance model. German corporations operate two-tier governance structures, with a management board and a separate supervisory board that does not contain any current executives. In addition, German law requires large companies

to have at least 50 percent supervisory board representation from workers. This structure is meant to provide more oversight by independent board members and greater involvement by a wider set of stakeholders.

In Volkswagen’s case, these objectives have been effectively circumvented. Although Volkswagen’s supervisory board does not include any current management, the chairmanship appears to be a revolving door of former senior executives. Ferdinand Piëch, the chair during the scandal, was CEO for nine years prior to becoming chair in 2002. Martin Winterkorn, the recently ousted CEO, was expected to become supervisory board chair prior to the scandal. The company continues to elevate manage- ment to the supervisory board even though they have presided over past scandals. Hans Dieter Poetsch, the newly appointed chair, was part of the management team that did not inform the supervisory board of the EPA investigation for two weeks.

VW also has a unique ownership structure where a single family, Porsche, controls more than 50 percent of voting shares. Piëch, a family member and chair until 2015, forced out CEOs and installed unqualified family members on the board, such as his former nanny and current wife. He also pushed out independent- minded board members, such as Gerhard Cromme, author of Germany’s corporate governance code. The company has lost numerous independent directors over the past 10 years, leav-

ing it with only one non-shareholder, non-labor repre- sentative. Although Piëch has now been removed, it is unclear that Volkswagen’s board has solved the under- lying problem. Shareholders have seen billions of dol- lars wiped away and the Volkswagen brand tarnished. As long as the board continues to lack independent directors, change will likely be slow.

Note: Developed with Jacob M. Crandall.

Sources: “Piëch under Fire,” The Economist, December 8, 2005; Chris Bryant and Richard Milne, “Boardroom Politics at Heart of VW Scandal,” Financial Times, October 4, 2015; Andreas Cremer and Jan Schwartz, “Volkswagen Mired in Crisis as Board Members Criticize Piech,” Reuters, April 24, 2015; Richard Milne, “Volkswagen: System Failure,” Finan- cial Times, November 4, 2015.

R&P: ©AR Pictures/Shutterstock

&Concepts Connections 2.4

Final PDF to printer

gam27636_ch02_013-035.indd 32 01/09/18 07:39 PM

32 Part 1 Section A: Introduction and Overview

KEY POINTS

The strategic management process consists of five interrelated and integrated stages:

1. Developing a strategic vision of the company’s future, a mission statement that defines the company’s current purpose, and a set of core values to guide the pursuit of the vision and mission. This stage of strategy making provides direction for the company, motivates and inspires company personnel, aligns and guides actions throughout the organization, and com- municates to stakeholders management’s aspirations for the company’s future.

2. Setting objectives and using the targeted results as yardsticks for measuring the company’s performance. Objectives need to spell out how much of what kind of performance by when. A balanced scorecard approach for measuring company performance entails setting both financial objectives and strategic objectives. Stretch objectives spur exceptional performance and help build a firewall against complacency and mediocre performance. A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and competitive actions on achieving that objective.

3. Crafting a strategy to achieve the objectives and move the company along the strategic course that management has charted. The total strategy that emerges is really a collection of strategic actions and business approaches initiated partly by senior company executives, partly by the heads of major business divisions, partly by functional-area managers, and partly by operating managers on the front lines. A single business enterprise has three lev- els of strategy—business strategy for the company as a whole, functional-area strategies for each main area within the business, and operating strategies undertaken by lower-echelon managers. In diversified, multibusiness companies, the strategy-making task involves four distinct types or levels of strategy: corporate strategy for the company as a whole, business strategy (one for each business the company has diversified into), functional-area strategies within each business, and operating strategies. Typically, the strategy-making task is more top-down than bottom-up, with higher-level strategies serving as the guide for developing lower-level strategies.

4. Implementing and executing the chosen strategy efficiently and effectively. Managing the implementation and execution of strategy is an operations-oriented, make-things-happen activity aimed at shaping the performance of core business activities in a strategy support- ive manner. Management’s handling of the strategy implementation process can be consid- ered successful if things go smoothly enough that the company meets or beats its strategic and financial performance targets and shows good progress in achieving management’s strategic vision.

5. Evaluating and analyzing the external environment and the company’s internal situation and performance to identify corrective adjustments in vision, objectives, strategy, or execution. This stage of the strategy management process is the trigger point for deciding whether to

what the board expects, (5) provides insight and advice to management, and (6) is intensely involved in debating the pros and cons of key decisions and actions.15 Boards of directors that lack the backbone to challenge a strong-willed or “imperial” CEO or that rubber-stamp most anything the CEO recommends without probing inquiry and debate abandon their duty to represent and protect shareholder interests.

Final PDF to printer

Chapter 2 Strategy Formulation, Execution, and Governance 33

gam27636_ch02_013-035.indd 33 01/09/18 07:39 PM

2. Go to the company investor relations websites for Starbucks (investor.starbucks.com), Pfizer (www.pfizer.com/investors), and Salesforce (investor.salesforce.com) to find examples of strategic and financial objectives. List four objectives for each company, and indicate which of these are strategic and which are financial.

3. Boeing has been recognized by Forbes and other business publications as one of the world’s best managed companies. The company discusses how its people and

LO2-2

LO2-3

continue or change the company’s vision, objectives, strategy, and/or strategy execution methods.

The sum of a company’s strategic vision, objectives, and strategy constitutes a strategic plan. Boards of directors have a duty to shareholders to play a vigilant role in overseeing management’s handling of a company’s strategy formulation, strategy execution process. A company’s board is obligated to (1) ensure that the company issues accurate financial reports and has adequate financial controls, (2) critically appraise and ultimately approve strategic action plans, (3) evalu- ate the strategic leadership skills of the CEO, and (4) institute a compensation plan for top executives that rewards them for actions and results that serve stakeholder interests, most espe- cially those of shareholders.

ASSURANCE OF LEARNING EXERCISES

1. Using the information in Tables 2.2 and 2.3, critique the adequacy and merit of the follow ing vision statements, listing effective elements and shortcomings. Rank the vision state- ments from best to worst once you complete your evaluation.

LO2-1 VISION STATEMENT Effective Elements Shortcomings

American Express We work hard every day to make American Express the world’s most respected service brand.

Hilton Hotels Corporation Our vision is to be the first choice of the world’s travelers. Hilton intends to build on the rich heritage and strength of our brands by: • Consistently delighting our customers • Investing in our team members • Delivering innovative products and services • Continuously improving performance • Increasing shareholder value • Creating a culture of pride • Strengthening the loyalty of our constituents

MasterCard A world beyond cash.

BASF We are “The Chemical Company” successfully operating in all major markets. • Our customers view BASF as their partner of choice. • Our innovative products, intelligent solutions and services make us the most competent world-

wide supplier in the chemical industry. • We generate a high return on assets. • We strive for sustainable development. • We welcome change as an opportunity. • We, the employees of BASF, together ensure our success.

Source: Company websites and annual reports.

Final PDF to printer

gam27636_ch02_013-035.indd 34 01/09/18 07:39 PM

34 Part 1 Section A: Introduction and Overview

organizational units bring to bear the “best of Boeing” to its customers in 150 countries at www.boeing.com/company. Prepare a one- to two-page report that explains how the com- pany has become a leader in commercial aviation through tight coordination of strategic initiatives at various organizational levels and functional areas.

4. Go to the investor relations website for Walmart Stores, Inc., (http://investors.walmartstores. com) and review past presentations it has made during various investor conferences by click- ing on the Events option in the navigation bar. Prepare a one- to two-page report that outlines what Walmart has said to investors about its approach to strategy execution. Specifically, what has management discussed concerning staffing, resource allocation, policies and proce- dures, information and operating systems, continuous improvement, rewards and incentives, corporate culture, and internal leadership at the company?

5. Based on the information provided in Concepts & Connections 2.4, describe the ways in which Volkswagen did not fulfill the requirements of effective corporate governance. In what ways did the board of directors sidestep its obligations to protect shareholder inter- ests? How could Volkswagen better select its board of directors to avoid mistakes such as the emissions scandal in 2015?

EXERCISES FOR SIMULATION PARTICIPANTS

1. Meet with your co-managers and prepare a strategic vision statement for your company. It should be at least one sentence long and no longer than a brief paragraph. When you are finished, check to see if your vision statement meets the conditions for an effectively worded strategic vision set forth in Table 2.2 and avoids the shortcomings set forth in Table 2.3. If not, then revise it accordingly. What would be a good slogan that captures the essence of your