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1 Crafting and Executing Strategy THE QUEST FOR COMPETITIVE ADVANTAGE: Concepts I TWENTY-FIRST EDITION Arthur A. Thompson The University of Alabama Margaret A. Peteraf Dartmouth College John E. Gamble Texas A&M University-Corpus Christi A.J. Strickland III The University of Alabama Mc Graw Hill Educatiori

2 CONTENTS PARTI Concepts and Techniques for Crafting and Executing Strategy 1 Section A: Introduction and Overview 1 What Is Strategy and Why Is It Important? 2 WH AT DO WE ME AN BY STRATEGY? 3 Strategy Is about Competing Differently 4 Strategy and the Quest for Competitive Advantage 4 Why a Company's Strategy Evolves over Time 8 A Company's Strategy Is Partly Proactive and Partly Reactive 8 A COMPANY'S STRATEGY AND ITS BUSINESS MODEL 9 WHAT MAKES A STRATEGY A WINNER? 12 WHY CRAFTING AND EXECUTING STRATEGY ARE IMPORTANT TASKS 13 Good Strategy + Good Strategy Execution = Good Management 13 THE ROAD AHEAD Starbucks's Strategy in the Coffeehouse Market Pandora, SiriusXM, and Over-the-Air Broadcast Radio: Three Contrasting Business Models 11 2 Charting a Company's Direction: Its Vision, Mission, Objectives, and Strategy 18 WHAT DOES THE STRATEGY-MAKING, STRATEGY-EXECUTING PROCESS ENTAIL? 19 STAGE1: DEVELOPING A STRATEGIC VISION, MISSION STATEMENT, AND SET OF CORE VALUES 20 Developing a Strategie Vision 21 Communicating the Strategie Vision 21 Developing a Company Mission Statement 24 Linking the Vision and Mission with Company Values 25 STAGE 2: SETTING OBJECTIVES 26 The Imperative of Setting Stretch Objectives 26 What Kinds of Objectives to Set 28 The Need for a Balanced Approach to Objective Setting 28 Setting Objectives for Every Organizational Level 30 xxxi

3 xxxii CONTENTS STAGE 3: CRAFTING A STRATEGY 31 Strategy Making Involves Managers at All Organizational Levels 31 A Company's Strategy-Making Hierarchy 32 Uniting the Strategy-Making Hierarchy 35 A Strategie Vision + Mission + Objectives + Strategy = A Strategie Plan 35 STAGE 4: EXECUTING THE STRATEGY 36 STAGE 5: EVALUATING PERFORMANCE AND INITIATING CORRECTIVE ADJUSTMENTS 37 CORPORATE GOVERNANCE: THE ROLE OF THE BOARD OF DIRECTORS IN THE STRATEGY-CRAFTING, STRATEGY-EXECUTING PROCESS Examples of Strategie Visions How Well Do They Measure Up? Patagonia, Inc.: A Values-Driven Company Examples of Company Objectives Corporate Governance Failures at Volkswagen 40 SectionB: Core Concepts and Analytical Tools 3 Evaluating a Company's External Environment 46 THE STRATEGICALLY RELEVANT FACTORS IN THE COMPANY'S MACRO-ENVIRONMENT 47 ASSESSING THE COMPANY'S INDUSTRY AND COMPETITIVE ENVIRONMENT 49 THE FIVE FORCES FRAMEWORK 50 Competitive Pressures Created by the Rivalry among Competing Seilers 52 The Choice of Competitive Weapons 54 Competitive Pressures Associated with the Threat of New Entrants 54 Competitive Pressures from the Seilers of Substitute Products 58 Competitive Pressures Stemming from Supplier Bargaining Power 60 Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity 62 Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability? 65 Malching Company Strategy to Competitive Conditions 65 COMPLEMENTORS AND THE VALUE NET 66 INDUSTRY DYNAMICS AND THE FORCES DRIVING CHANCE 67 Identifying the Forces Driving Industry Change 67 Assessing the Impact of the Forces Driving Industry Change 70 Adjusting the Strategy to Prepare for the Impacts of Driving Forces 70 STRATEGIC GROUP ANALYSIS 71 Using Strategie Group Maps to Assess the Market Positions of Key Competitors 71 The Value of Strategie Group Maps 73

4 CONTENTS xxxiii COMPETITOR ANALYSIS 74 KEY SUCCESS FACTORS 75 THE INDUSTRY OUTLOOK FOR PROFITABILITY Comparative Market Positions of Selected Companies in the Casual Dining Industry: A Strategie Group Map Example 72 4 Evaluating a Company's Resources, Capabilities, and Competitiveness 82 QUESTION 1: HOW WELL IS THE COMPANY'S PRESENT STRATEGY WORKING? 83 QUESTION 2: WHAT ARE THE COMPANY'S MOST IMPORTANT RESOURCES AND CAPABILITIES, AND WILL THEY GIVE THE COMPANY A LASTING COMPETITIVE ADVANTAGE OVER RIVAL COMPANIES? 87 Identifying the Company's Resources and Capabilities 88 Assessing the Competitive Power of a Company's Resources and Capabilities 91 QUESTION 3: WHAT ARE THE COMPANY'S STRENGTHS AND WEAKNESSES IN RELATION TO THE MARKET OPPORTUNITIES AND EXTERNAL THREATS? 94 Identifying a Company's Internal Strengths 94 Identifying Company Weaknesses and Competitive Deficiencies 95 Identifying a Company's Market Opportunities 95 Identifying the Threats to a Company's Future Profitability 97 What Do the SWOT Listings Reveal? 97 QUESTION 4: HOW DO A COMPANY'S VALUE CHAIN ACTIVITIES IMPACT ITS COST STRUCTURE AND CUSTOMER VALUE PROPOSITION? 99 The Concept of a Company Value Chain 99 The Value Chain System 103 ßenchmarking: A Tool for Assessing Whether the Costs and Effectiveness of a Company's Value Chain Activities Are in Line 104 Strategie Options for Remedying a Cost or Value Disadvantage 105 Translating Proficient Performance of Value Chain Activities into Competitive Advantage 107 QUESTION 5: IS THE COMPANY COMPETITIVELY STRONGER OR WEAKER THAN KEY RIVALS? 109 Strategie Implications of Competitive Strength Assessments 111 QUESTION 6: WHAT STRATEGIC ISSUES AND PROBLEMS MERIT FRONT-BURNER MANAGERIAL ATTENTION? The Value Chain for Boll & Branch Delivered-Cost ßenchmarking in the Cement Industry 106

5 xxxiv CONTENTS Section C: Crafting a Strategy 5 The Five Generic Competitive Strategies 120 TYPES OF GENERIC COMPETITIVE STRATEGIES 121 LOW-COST PROVIDER STRATEGIES 122 The Two Major Avenues for Achieving a Cost Advantage 123 The Keys to Being a Successful Low-Cost Provider 128 When a Low-Cost Provider Strategy Works Best 128 Pitfaiis to Avoid in Pursuing a Low-Cost Provider Strategy 129 BROAD DIFFERENTIATION STRATEGIES 129 Managing the Value Chain to Create the Differentiating Attributes 130 Delivering Superior Value via a Broad Differentiation Strategy 132 When a Differentiation Strategy Works Best 134 Pitfaiis to Avoid in Pursuing a Differentiation Strategy 135 FOCUSED (OR MARKET NICHE) STRATEGIES 136 A Focused Low-Cost Strategy 136 A Focused Differentiation Strategy 137 When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive 138 The Risks of a Focused Low-Cost or Focused Differentiation Strategy 138 BEST-COST PROVIDER STRATEGIES 140 When a Best-Cost Provider Strategy Works Best 141 The Risk of a Best-Cost Provider Strategy 141 THE CONTRASTING FEATURES OF THE FIVE GENERIC COMPETITIVE STRATEGIES: A SUMMARY 143 Successful Competitive Strategies Are Resource-Based Amazon's Path to Becoming the Low-Cost Provider in E-commerce Clirucas del Azücar's Focused Low-Cost Strategy Canada Goose's Focused Differentiation Strategy American Giant's Best-Cost Provider Strategy Strengthening a Company's Competitive Position: Strategie Moves, Timing, and Scope of Operations 148 LAUNCHING STRATEGIC OFFENSIVES TO IMPROVE A COMPANY'S MARKET POSITION 149 Choosing the Basis for Competitive Attack 150 Choosing Which Rivals to Attack 152 Blue-Ocean Strategy a Special Kind of Offensive 152 DEFENSIVE STRATEGIES PROTECTING MARKET POSITION AND COMPETITIVE ADVANTAGE 153 Blocking the Avenues Open to Challengers 154 Signaling Challengers That Retaliation Is Likely 155

6 CONTENTS XXXV TIMING A COMPANY'S STRATEGIC MOVES 155 The Potential for First-Mover Advantages 155 The Potential for Late-Mover Advantages or First-Mover Disadvantages 156 To Be a First Mover or Not 158 STRENGTHENING A COMPANY'S MARKET POSITION VIA ITS SCOPE OF OPERATIONS 158 HORIZONTAL MERGER AND ACQUISITION STRATEGIES 159 Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results 161 VERTICAL INTEGRATION STRATEGIES 162 The Advantages of a Vertical Integration Strategy 163 The Disadvantages of a Vertical Integration Strategy 165 Weighing the Pros and Cons of Vertical Integration 166 OUTSOURCING STRATEGIES: NARROWING THE SCOPE OF OPERATIONS 167 The Risk of Outsourcing Value Chain Activities 168 STRATEGIC ALLIANCES AND PARTNERSHIPS 169 Capturing the Benefits of Strategie Alliances 171 The Drawbacks of Strategie Alliances and Partnerships 172 How to Make Strategie Alliances Work Bonobos's Blue-Ocean Strategy in the U.S. Men's Fashion Retail Industry Uber's First-Mover Advantage in Mobile Ride-Hailing Services Bristol-Myers Squibb's "String-of-Pearls" Horizontal Acquisition Strategy Kaiser Permanente's Vertical Integration Strategy Strategies for Competing in International Markets 178 WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS 179 WHY COMPETING ACROSS NATIONAL BORDERS MAKES STRATEGY MAKING MORE COMPLEX 181 Home-Country Industry Advantages and the Diamond Model 181 Opportunities for Location-Based Advantages 183 The Impact of Government Policies and Economic Conditions in Host Countries 184 The Risks of Adverse Exchange Rate Shifts 185 Cross-Country Differences in Demographic, Cultural, and Market Conditions 187 STRATEGIC OPTIONS FOR ENTERING INTERNATIONAL MARKETS 188 Export Strategies 188 Licensing Strategies 189 Franchising Strategies 189 Foreign Subsidiary Strategies 190 Alliance and Joint Venture Strategies 191

7 xxxvi CONTENTS INTERNATIONAL STRATEGY: THE THREE MAIN APPROACHES 193 Multidomestic Strategies a "Think-Local, Act-Local" Approach 194 Global Strategies a "Think-Global, Act-Global" Approach 195 Transnational Strategies a "Think-Global, Act-Local" Approach 196 INTERNATIONAL OPERATIONS AND THE QUEST FOR COMPETITIVE ADVANTAGE 199 Using Location to Build Competitive Advantage 199 Sharing and Transferring Resources and Capabilities across Borders to Build Competitive Advantage 200 Benefiting from Cross-Border Coordination 202 CROSS-BORDER STRATEGIC MOVES 202 Using Profit Sanctuaries to Wage a Strategie Offensive 202 Using Profit Sanctuaries to Defend against International Rivals 203 STRATEGIES FOR COMPETING IN THE MARKETS OF DEVELOPING COUNTRIES 204 Strategy Options for Competing in Developing-Country Markets 204 DEFENDING AGAINST GLOBAL GIANTS: STRATEGIES FOR LOCAL COMPANIES IN DEVELOPING COUNTRIES Walgreens Boots Alliance, Inc.: Entering Foreign Markets via Alliance Followed by Merger Four Seasons Hotels: Local Character, Global Service How Ctrip Successfully Defended against International Rivals to Become China's Largest Online Travel Agency Corporate Strategy: Diversification and the Multibusiness Company 214 WHAT DOES CRAFTING A DIVERSIFICATION STRATEGY ENTAIL? 215 WHEN TO CONSIDER DIVERSIFYING 216 BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING 217 APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP 218 Diversifying by Acquisition of an Existing Business 218 Entering a New Line of Business through Internal Development 218 Using Joint Ventures to Achieve Diversification 219 Choosing a Mode of Entry 219 CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES 221 DIVERSIFICATION INTO RELATED BUSINESSES 221 Identifying Cross-Business Strategie Fit along the Value Chain 224 Strategie Fit, Economies of Scope, and Competitive Advantage 226 DIVERSIFICATION INTO UNRELATED BUSINESSES 228 Building Shareholder Value via Unrelated Diversification 229 The Path to Greater Shareholder Value through Unrelated Diversification 232

8 CONTENTS xxxvii The Drawbacks of Unrelated Diversification 232 Misguided Reasons for Pursuing Unrelated Diversification 233 COMBINATION RELATED-UNRELATED DIVERSIFICATION STRATEGIES 234 EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY 235 Step 1: Evaluating Industry Attractiveness 236 Step 2: Evaluating Business Unit Competitive Strength 237 Step 3: Determining the Competitive Value of Strategie Fit in Diversified Companies 242 Step 4: Checking for Good Resource Fit 243 Step 5: Ranking Business Units and Assigning a Priority for Resource Allocation 246 Step 6: Crafting New Strategie Moves to Improve Overall Corporate Performance The Kraft-Heinz Merger: Pursuing the Benefits of Cross-Business Strategie Fit Restructuring for Better Performance at Hewlett-Packard (HP) Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy 258 WHAT DO WE MEAN BY BUSINESS ETHICS? 259 WHERE DO ETHICAL STANDARDS COME FROM-ARE THEY UNIVERSAL OR DEPENDENT ON LOCAL NORMS? 260 The School of Ethical Universalism 260 The School of Ethical Relativism 261 Ethics and Integrative Social Contracts Theory 264 HOW AND WHY ETHICAL STANDARDS IMPACT THE TASKS OF CRAFTING AND EXECUTING STRATEGY 265 DRIVERS OF UNETHICAL BUSINESS STRATEGIES AND BEHAVIOR 266 WHY SHOULD COMPANY STRATEGIES BE ETHICAL? 269 The Moral Case for an Ethical Strategy 269 The Business Case for Ethical Strategies 269 STRATEGY, CORPORATE SOCIAL RESPONSIBILITY, AND ENVIRONMENTAL SUSTAINABILITY 272 The Concepts of Corporate Social Responsibility and Good Corporate Citizenship 272 What Do We Mean by Sustainability and Sustainabie Business Practices? 278 Crafting Corporate Social Responsibility and Sustainability Strategies 279 The Moral Case for Corporate Social Responsibility and Environmental^ Sustainabie Business Practices 281 The Business Case for Corporate Social Responsibility and Environmental^ Sustainabie Business Practices 282

9 xxxviii CONTENTS 9.1 IKEA's Global Supplier Standards: Maintaining Low Costs While Fighting the Root Causes of Child Labor How Novo Nordisk Puts Its Ethical Principles into Practice Warby Parker: Combining Corporate Social Responsibility with Affordable Fashion Unilever's Focus on Sustainability 280 Section D: Executing the Strategy 10 Building an Organization Capable of Good Strategy Execution: People, Capabilities, and Structure 290 A FRAMEWORK FOR EXECUTING STRATEGY 292 The Principal Components of the Strategy Execution Process 292 BUILDING AN ORGANIZATION CAPABLE OF GOOD STRATEGY EXECUTION: THREE KEY ACTIONS 295 STAFFING THE ORGANIZATION 296 Putting Together a Strong Management Team 296 Recruiting, Training, and Retaining Capable Employees 297 DEVELOPING AND BUILDING CRITICAL RESOURCES AND CAPABILITIES 300 Three Approaches to Building and Strengthening Capabilities 300 The Strategie Role of Employee Training 303 Strategy Execution Capabilities and Competitive Advantage 303 MATCHING ORGANIZATIONAL STRUCTURE TO THE STRATEGY 305 Deciding Which Value Chain Activities to Perform Internally and Which to Outsource 305 Aligning the Firm's Organizational Structure with Its Strategy 308 Determining How Much Authority to Delegate 312 Facilitating Collaboration with External Partners and Strategie Allies 315 Further Perspectives on Structuring the Work Effort Management Development at Deloitte Touche Tohmatsu Limited Zara's Strategy Execution Capabilities Which Value Chain Activities Does Apple Outsource and Why? Managing Internal Operations: Actions That Promote Good Strategy Execution 320 ALLOCATING RESOURCES TO THE STRATEGY EXECUTION EFFORT 321 INSTITUTING POLICES AND PROCEDURES THAT FACILITATE STRATEGY EXECUTION 323

10 CONTENTS xxxix ADOPTING BEST PRACTICES AND EMPLOYING PROCESS MANAGEMENT TOOLS 325 How the Process of Identifying and Incorporating Best Practices Works 325 Business Process Reengineering, Total Quality Management, and Six Sigma Quality Programs: Tools for Promoting Operating Excellence 326 Capturing the Benefits of Initiatives to Improve Operations 331 INSTALLING INFORMATION AND OPERATING SYSTEMS 332 Instituting Adequate Information Systems, Performance Tracking, and Controls 333 USING REWARDS AND INCENTIVES TO PROMOTE BETTER STRATEGY EXECUTION 334 Incentives and Motivational Practices That Facilitate Good Strategy Execution 335 Striking the Right Balance between Rewards and Punishment 336 Linking Rewards to Achieving the Right Outcomes Charleston Area Medical Center's Six Sigma Program How the Best Companies to Work for Motivate and Reward Employees Nucor Corporation: Tying Incentives Directly to Strategy Execution Corporate Culture and Leadership: Keys to Good Strategy Execution 346 INSTILLING A CORPORATE CULTURE CONDUCIVE TO GOOD STRATEGY EXECUTION 347 Identifying the Key Features of a Company's Corporate Culture 348 Strang versus Weak Cultures 352 Why Corporate Cultures Matter to the Strategy Execution Process 354 Healthy Cultures That Aid Good Strategy Execution 355 Unhealthy Cultures That Impede Good Strategy Execution 357 Changing a Problem Culture 359 LEADING THE STRATEGY EXECUTION PROCESS 362 Staying on Top of How Well Things Are Going 364 Mobilizing the Effort for Excellence in Strategy Execution 364 Leading the Process of Making Corrective Adjustments 366 A FINAL WORD ON LEADING THE PROCESS OF CRAFTING AND EXECUTING STRATEGY Strong Guiding Principles Drive the High-Performance Culture at Epic Culture Transformation at America Latina Logfstica 363 INDEXES COMPANY 1-1 NAME I-7 SUBJECT 1-11