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THE QUEST FOR COMPETITIVE ADVANTAGE
Concepts and Cases
EIGHTEENTH EDITION
Arthur A. ThompsonThe University of Alabama
Margaret A. PeterafDartmouth College
John E. GambleUniversity of South Alabama
A. J. Strickland illThe University of Alabama
drawHill
McGraw-HillIrwin
TABLE OF CONTENTS
PAIRT ©ME Concepts and Techniques forCrafting and Executing Strategy
Section A: Introduction and Overview
IMPORTANT? 50What Do We Mean by Strategy? 52
Strategy and the Quest for Competitive Advantage 53Why a Company's Strategy Evolves over Time 57A Company's Strategy Is Partly Proactive and Partly Reactive 58
The Relationship between a Company's Strategy and Its BusinessModel 59
What Makes a Strategy a Winner? 60
Why Crafting and Executing Strategy Are Important Tasks 62
Good Strategy + Good Strategy Execution = Good Management 62
The Road Ahead 63
ILLUSTRATION CAPSULES1.1 McDonald's Strategy in the Quick-Service Restaurant
Industry 551.2 Microsoft and Red Hat Linux: Two Contrasting Business
Models 61
2 CHARTING A COMPANY'S DIRECTION:VISION AND MISSION, OBJECTIVES, A^DSTRATEGY 68What Does the Strategy-Making, Strategy-Executing ProcessEntail? 69
Stage 1: Developing a Strategic Vision, a Mission, and a Set of CoreValues 70
Developing a Strategic Vision 70Communicating the Strategic Vision 71Crafting a Mission Statement 74Linking the Vision and Mission with Company Values 75
Stage 2: Setting Objectives 76
What Kinds of Objectives to Set 76
Stage 3: Crafting a Strategy 8136
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Strategy Making Involves Managers at All Organizational Levels 81A Strategic Vision + Objectives + Strategy = A Strategic Plan 85
Stage 4: Executing the Strategy 86
Stage 5: Evaluating Performance and Initiating CorrectiveAdjustments 87
Corporate Governance: The Role of the Board of Directors in theStrategy-Crafting, Strategy-Executing Process 88
ILLUSTRATION CAPSULES2.1 Examples of Strategic Visions—How Well Do They Measure Up? 732.2 Royal Dutch Shell Mission, Core Values, and Business Principles 772.3 Examples of Company Objectives 802.4 Corporate Governance Failures at Fannie Mae and Freddie Mac 90
Section B: Core Concepts and Analytical Tools
3 EVALUATING A COMPANY'S EXTERNALENVIRONMENT 96The Strategically Relevant Components of a Company'sMacro-Environment 98
Thinking Strategically about a Company's Industry and CompetitiveEnvironment 100
Question 1: Does the Industry Offer Attractive Opportunities forGrowth? 101
Question 2: What Kinds of Competitive Forces Are Industry MembersFacing, and How Strong Are They? 102
Competitive Pressures Created by the Rivalry among CompetingSellers 102Competitive Pressures Associated with the Threat of New Entrants 107Competitive Pressures from the Sellers of Substitute Products 111Competitive Pressures Stemming from Supplier Bargaining Power 112Competitive Pressures Stemming from Buyer Bargaining Power andPrice Sensitivity 115Is the Collective Strength of the Five Competitive Forces Conducive toGood Profitability? 118
Question 3: What Factors Are Driving Industry Change, and WhatImpacts Will They Have? 120
Analyzing Industry Dynamics 120Identifying an Industry's Drivers of Change 120Assessing the Impact of the Factors Driving Industry Change 124Developing a Strategy That Takes the Changes in Industry Conditionsinto Account 125
Question 4: How Are Industry Rivals Positioned—Who Is StronglyPositioned and Who Is Not? 125
Using Strategic Group Maps to Assess the Market Positions of KeyCompetitors 126What Can Be Learned from Strategic Group Maps? 127
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Question 5: What Strategic Moves Are Rivals Likely to Make Next? 128
Question 6: What Are the Key Factors for Future CompetitiveSuccess? 130
Question 7: Does the Industry Offer Good Prospects for AttractiveProfits? 131
ILLUSTRATION CAPSULES3.1 Comparative Market Positions of Selected Retail Chains: A
Strategic Group Map Example 127
4 EVALUATING A COMPANY'S RESOURCES,CAPABILITIES, AND COMPETITIVENESS 138Question 1: How Well Is the Company's Present StrategyWorking? 140
Question 2: What are the Company's Competitively ImportantResources and Capabilities? 141
Identifying the Company's Resources and Capabilities 144Determining Whether a Company's Resources and Capabilities ArePotent Enough to Produce a Sustainable Competitive Advantage 147
Question 3: Is the Company Able to Seize Market Opportunities andNullify External Threats? 150
Identifying a Company's Internal Strengths 151Identifying Company Weaknesses and Competitive Deficiencies 152Identifying a Company's Market Opportunities 152Identifying the Threats to a Company's Future Profitability 153What Do the SWOT Listings Reveal? 155
Question 4: Are the Company's Prices and Costs Competitive withThose of Key Rivals, and Does It Have an Appealing Customer ValueProposition? 156
The Concept of a Company Value Chain 157The Value Chain System for an Entire Industry 161Benchmarking: A Tool for Assessing Whether the Costs and Effectivenessof a Company's Value Chain Activities Are in Line 162Strategic Options for Remedying a Disadvantage in Costs orEffectiveness 163Translating Proficient Performance of Value Chain Activities intoCompetitive Advantage 166
Question 5: Is the Company Competitively Stronger or Weaker thanKey Rivals? 168
Strategic Implications of Competitive Strength Assessments 172
Question 6: What Strategic Issues and Problems Merit Front-BurnerManagerial Attention? 173
ILLUSTRATION CAPSULES4.1 The Value Chain for Just Coffee, a Producer of Fair-Trade Organic
Coffee 1604.2 Benchmarking and Ethical Conduct 164
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Section C: Crafting a Strategy
5 THE FIVE GENERIC COMPETITIVE STRATEGIES:WHICH ONETO EMPLOY? 182
The Five Generic Competitive Strategies 183
Low-Cost Provider Strategies 185
The Two Major Avenues for Achieving a Cost Advantage 185The Keys to Being a Successful Low-Cost Provider 190When a Low-Cost Provider Strategy Works Best 192Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy 193
Broad Differentiation Strategies 193
Managing the Value Chain to Create the Differentiating Attributes 194Delivering Superior Value via a Broad Differentiation Strategy 197When a Differentiation Strategy Works Best 199Pitfalls to Avoid in Pursuing a Differentiation Strategy 199
Focused (Or Market Niche) Strategies 201
A Focused Low-Cost Strategy 201A Focused Differentiation Strategy 201When a Focused Low-Cost or Focused Differentiation Strategy IsAttractive 202The Risks of a Focused Low-Cost or Focused Differentiation Strategy 203
Best-Cost Provider Strategies 205
When a Best-Cost Provider Strategy Works Best 206The Big Risk of a Best-Cost Provider Strategy 207
The Contrasting Features of the Five Generic CompetitiveStrategies: A Summary 208
Successful Competitive Strategies Are Resource-Based 210
ILLUSTRATION CAPSULES5.1 How Walmart Managed Its Value Chairi'fo Achieve a Huge Low-
Cost Advantage over Rival Supermarket Chains 1915.2 Vizio's Focused Low-Cost Strategy 2035.3 Nestle Nespresso's Focused Differentiation Strategy
in the Coffee Industry 2045.4 Toyota's Best-Cost Provider Strategy for Its Lexus Line 207
6 STRENGTHENING A COMPANY'S COMPETITIVEPOSITION: STRATEGIC MOVES, TIMING, ANDSCOPE OF OPERATIONS 214
Going on the Offensive—Strategic Options to Improve a Company'sMarket Position 215
Choosing the Basis for Competitive Attack 216Choosing Which Rivals to Attack 218Blue-Ocean Strategy—A Special Kind of Offensive 219
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Defensive Strategies—Protecting Market Position and CompetitiveAdvantage 220
Blocking the Avenues Open to Challengers 220Signaling Challengers That Retaliation Is Likely 221
Timing a Company's Offensive and Defensive Strategic Moves 221
The Potential for First-Mover Advantages 221The Potential for First-Mover Disadvantages or Late-MoverAdvantages 223To Be a First Mover or Not 224
Strengthening a Company's Market Position via Its Scope ofOperations 225
Horizontal Merger and Acquisition Strategies 226
Why Mergers and Acquisitions Sometimes Fail to Produce AnticipatedResults 229
Vertical Integration Strategies 229
The Advantages of a Vertical Integration Strategy 231The Disadvantages of a Vertical Integration Strategy 233Weighing the Pros and Cons of Vertical Integration 234
Outsourcing Strategies: Narrowing the Scope of Operations 235
The Big Risk of Outsourcing Value Chain Activities 236
Strategic Alliances and Partnerships 237
Why and How Strategic Alliances Are Advantageous 240Capturing the Benefits of Strategic Alliances 241The Drawbacks of Strategic Alliances and Partnerships 242How to Make Strategic Alliances Work 243
ILLUSTRATION CAPSULES6.1 Amazon.corn's First-Mover Advantage in Online Retailing 2246.2 Clear Channel Communications: Using Mergers and
Acquisitions to Become a Global Market Leader in RadioBroadcasting '230
7 STRATEGIES FOR COMPETING ININTERNATIONAL MARKETS 250Why Companies Decide to Enter Foreign Markets 252
Why Competing across National Borders Makes Strategy Making MoreComplex 253
Cross-Country Variation in Factors That Affect IndustryCompetitiveness 253Locating Value Chain Activities for Competitive Advantage 255The Impact of Government Policies and Economic Conditions in HostCountries 256The Risks of Adverse Exchange Rate Shifts 257Cross-Country Differences in Demographic, Cultural, and MarketConditions 259
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The Concepts of Multidomestic Competition and GlobalCompetition 260
Strategic Options for Entering and Competing in InternationalMarkets 262
Export Strategies 262Licensing Strategies 263Franchising Strategies 263Acquisition Strategies 264Greenfield Venture Strategies 264Alliance and Joint Venture Strategies 265
Competing Internationally: The Three Main StrategicApproaches 268
Multidomestic Strategy—Think Local, Act Local 269Global Strategy—Think Global, Act Global 271Transnational Strategy—Think Global, Act Local 272
The Quest for Competitive Advantage in the International Arena 273
Using Location to Build Competitive Advantage 273Sharing and Transferring Resources and Capabilities across Borders toBuild Competitive Advantage 275Using Cross-Border Coordination for Competitive Advantage 277
Profit Sanctuaries and Cross-Border Strategic Moves 277
Using Cross-Market Subsidization to Wage a Strategic Offensive 279Using Cross-Border Tactics to Defend against International Rivals 280
Strategies for Competing in the Markets of Developing Countries 280
Strategy Options for Competing in Developing-Country Markets 281
Defending against Global Giants: Strategies for Local Companiesin Developing Countries 284
ILLUSTRATION CAPSULES
7.1 Four Examples of Cross-Border Strategic Alliances 2677.2 Yum! Brands' Strategy for Becoming the Leading Food Service
Brand in China 2827.3 How Ctrip Successfully Defended against International Rivals to
Become China's Largest Online Travel Agency 285
8 CORPORATE STRATEGY: DIVERSIFICATIONS ANDTHE MULTIBUSINESS COMPANY 292
When to Diversify 294
Building Shareholder Value: The Ultimate Justification forDiversifying 295
Strategies for Entering New Businesses 296
Acquisition of an Existing Business 296Internal Development 297
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Joint Ventures 298Choosing a Mode of Entry 298
Choosing the Diversification Path: Related versus UnrelatedBusinesses 300
Strategic Fit and Diversification into Related Businesses 300
Identifying Cross-Business Strategic Fit along the Value Chain 304Strategic Fit, Economies of Scope, and Competitive Advantage 306
Diversification into Unrelated Businesses 307
Building Shareholder Value via Unrelated Diversification 308The Path to Greater Shareholder Value through UnrelatedDiversification 310The Drawbacks of Unrelated Diversification 311Inadequate Reasons for Pursuing Unrelated Diversification 312
Combination Related-Unrelated Diversification Strategies 313
Evaluating the Strategy of a Diversified Company 313
Step 1: Evaluating Industry Attractiveness 314Step 2: Evaluating Business-Unit Competitive Strength 317Step 3: Checking the Competitive Advantage Potential of Cross-BusinessStrategic Fit 321Step 4: Checking for Resource Fit 322Step 5: Ranking the Performance Prospects of Business Units andAssigning a Priority for Resource Allocation 325Step 6: Crafting New Strategic Moves to Improve Overall CorporatePerformance 326
ILLUSTRATION CAPSULE8.1 Managing Diversification at Johnson & Johnson: The Benefits
of Cross-Business Strategic Fit 329
9 ETHICS, CORPORATE SOCIAL RESPONSIBILITY,ENVIRONMENTAL SUSTAINABILITY, ANDSTRATEGY 338What Do We Mean by Business Ethics? 339
Where Do Ethical Standards Come From—Are They Universal orDependent on Local Norms? 340
The School of Ethical Universalism 340The School of Ethical Relativism 342Ethics and Integrative Social Contracts Theory 345
How and Why Ethical Standards Impact the Tasks of Craftingand Executing Strategy 346
What are the Drivers of Unethical Strategies and BusinessBehavior? 348
Why Should Company Strategies be Ethical? 352
The Moral Case for an Ethical Strategy 354The Business Case for Ethical Strategies 354
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Strategy Corporate Social Responsibility, and EnvironmentalSustainability 356
What Do We Mean by Corporate Social Responsibility? 356What Do We Mean by Sustainability and Sustainable BusinessPractices? 362Crafting Corporate Social Responsibility and SustainabilityStrategies 364The Moral Case for Corporate Social Responsibility and EnvironmentallySustainable Business Practices 365The Business Case for Corporate Social Responsibility andEnvironmentally Sustainable Business Practices 366
ILLUSTRATION CAPSULES9.1 Many of Apple's Suppliers Flunk the Ethics Test 3419.2 Investment Fraud at Bernard L. Madoff Investment Securities and
Stanford Financial Group 3509.3 How General Electric's Top Management Built a Culture That Fuses
High Performance with High Integrity 3539.4 John Deere's Approach to Corporate Social Responsibility 359
Section D: Executing the Strategy
10 BUILDING AN ORGANIZATION CAPABLE OF GOODSTRATEGY EXECUTION: PEOPLE, CAPABILITIES,AND STRUCTURE 374A Framework for Executing Strategy 376
The Principal Components of the Strategy Execution Process 377
Building an Organization Capable of Good Strategy Execution: Whereto Begin 379
Staffing the Organization 381
Putting Together a Strong Management Team 381Recruiting, Training, and Retaining Capable Employees 382
Building and Strengthening Core Competencies and CompetitiveCapabilities 385
Three Approaches to Building and Strengthening Capabilities 385Upgrading Employee Skills and Knowledge Resources 389Strategy Execution Capabilities and Competitive Advantage 390
Organizing the Work Effort With a Supportive OrganizationalStructure 390
Deciding Which Value Chain Activities to Perform Internally and Whichto Outsource 391Aligning the Firm's Organizational Structure with Its Strategy 393Determining How Much Authority to Delegate 397Facilitating Collaboration with External Partners and Strategic Allies 400Further Perspectives on Structuring the Work Effort 401
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ILLUSTRATION CAPSULES10.1 How General Electric Develops a Talented and Deep Management
Team 38310.2 Toyota's Legendary Production System: A Capability That
Translates into Competitive Advantage 387
11 MANAGING INTERNAL OPERATIONS:
EXECUTION 406Allocating Resources to the Strategy Execution Effort 407
Instituting Policies and Procedures That Facilitate StrategyExecution 409
Using Process Management Tools to Strive for ContinuousImprovement 411
How the Process of Identifying and Incorporating Best Practices Works 411Business Process Reengineering, Total Quality Management, and SixSigma Quality Programs: Tools for Promoting Operating Excellence 413Capturing the Benefits of Initiatives to Improve Operations 419
Installing Information and Operating Systems 420
Instituting Adequate Information Systems, Performance Tracking,and Controls 422
Tying Rewards and Incentives to Strategy Execution 423
Incentives and Motivational Practices That Facilitate Good StrategyExecution 424Striking the Right Balance between Rewards and Punishment 425Linking Rewards to Strategically Relevant Performance Outcomes 427
ILLUSTRATION CAPSULES11.1 Whirlpool's Use of Six Sigma to Promote Operating
Excellence 417.11.2 What Companies Do to Motivate and Reward Employees 42611.3 Nucor Corporation: Tying Incentives Directly to Strategy
Execution 429
12 CORPORATE CULTURE AMD LEADERSHIP: KEYSTO GOOD STRATEGY EXECUTION 436Instilling a Corporate Culture That Promotes Good Strategy Execution 437
Identifying the Key Features of a Company's Corporate Culture 438Company Cultures Can Be Strongly or Weakly Embedded 443Why Corporate Cultures Matter to the Strategy Execution Process 445Healthy Cultures That Aid Good Strategy Execution 446Unhealthy Cultures That Impede Good Strategy Execution 448Changing a Problem Culture: The Role of Leadership 450
Leading the Strategy Execution Process 454
Staying on Top of How Well Things Are Going 455
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Putting Constructive Pressure on Organizational Units to Execute theStrategy Well and Achieve Operating Excellence 455Leading the Process of Making Corrective Adjustments 457
A Final Word on Leading the Process of Crafting and ExecutingStrategy 458
ILLUSTRATION CAPSULE12.1 The Corporate Cultures at Google and Alberto-Culver 439
Cases in Crafting and Executing Strategy
Section A: Crafting Strategy in Single-Business Companies
1 Afrigator: A Killer Start-up in Africa C-2Debapratim Purkayastha, IBS Center for Management ResearchSyeda Maseeha Qumer, IBS Center for Management Research
2 Competition in Energy Drinks, Sports Drinks, and Vitamin-Enhanced Beverages C-17
John E. Gamble, University of South Alabama
3 Competition in the Golf Equipment Industry in 2009 C-30John E. Gamble, University of South Alabama
4 Dell Inc. in 2008: Can It Overtake Hewlett-Packard as the WorldwideLeader in Personal Computers? C-51
Arthur A. Thompson, The University of AlabamaJohn E. Gamble, University of South Alabama
5 Atlassian: Supporting the World with Legendary Service C-81Tatiana Zalan, University of South Australia, AustraliaOlga Muzychenko, University of Adelaide, AustraliaSam Burshtein, Swinburne University of Technology, Australia
6 Nintendo's Strategy in 2009: The Ongoing Battle with Microsoft andSony C-95
Lou Marino, The University of AlabamaSally Sarrett, The University of Alabama
7 TomTom: New Competition Everywhere! C-107Alan N. Hoffman, Rotterdam School of Management, Erasmus Universityand Bentley University
8 Apple Inc. in 2010 C-122Lou Marino, The University of AlabamaJohn E. Gamble, University of South Alabama
9 Google's Strategy in 2010 C-136John E. Gamble, University of South Alabama
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10 Research In Motion: Managing Explosive Growth C-156Rod White, University of Western OntarioPaul Beamish, University of Western OntarioDaina Mazutis, University of Western Ontario
11 Problems at China Airlines C-172Debapratim Purkayastha, IBS Center for Management ResearchHadiya Faheem, IBS Center for Management ResearchMonjori Samanta, IBS Center for Management Research
12 Canadian Solar C-189Jordan Mitchell, University of Western OntarioPaul W. Beamish, University of Western Ontario
13 Cemex's Cost of 'Globalised' Growth—The Cash Crunch? C-212M.V. Vivek Gonela, IBSCDCSaradhi Kumar Gonela, IBSCDCNagendra V. Chowdary, IBSCDC
14 Corona Beer: Challenges of International Expansion C-228Ashok Som, ESSEC Business School
15 Globalization of Komatsu: Digging Out of Trouble C-239Nadine Khayat, INSEADJ. Stewart Black, INSEAD
Section B: Crafting Strategy in Diversified Companies
16 PepsiCo's Diversification Strategy in 2008 C-255John E. Gamble, University of South Alabama
17 Adidas in 2009: Has Corporate Restructuring Increased ShareholderValue? C-271
John E. Gamble, University of South Alabama
Section C: Implementing and Executing Strategy
18 Robin Hood C-286Joseph Lampel, New York University
19 Shangri-La Hotels C-288Dennis Campbell, Harvard Business SchoolBrent Kazan, Harvard Business School
20 Toyota Motor Company: Losing Its Quality Edge? C-304Debapratim Purkayastha, IBS Center for Management ResearchSyeda Maseeha Qumer, IBS Center for Management Research
21 Starbucks' Strategy and Internal Initiatives to Return to ProfitableGrowth C-326
Arthur A. Thompson, The University of AlabamaAmit J. Shah, Frostburg State University
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Section D: Strategy, Ethics and Social Responsibility
22 Rhino Capture in Kruger National Park C-361A. J.-Strickland, The University of AlabamaWilliam E. Mixon, The University of Alabama MBA Candidate
23 Coca-Cola India's Corporate Social Responsibility Strategy C-377Debapratim Purkayastha, IBS Center for Management ResearchHadiya Faheem, IBS Center for Management Research
24 Detecting Unethical Practices at Supplier Factories: The Monitoringand Compliance Challenges C-396
Arthur A. Thompson, The University of Alabama
INDEXES
Company II
Name 112
Subject 118
