THE QUEST FOR COMPETITIVE ADVANTAGE Concepts and Cases QUEST FOR COMPETITIVE ADVANTAGE Concepts and Cases ... Developing a Strategic Vision, ... The Moral Case for an Ethical Strategy 354

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    Concepts and Cases


    Arthur A. ThompsonThe University of Alabama

    Margaret A. PeterafDartmouth College

    John E. GambleUniversity of South Alabama

    A. J. Strickland illThe University of Alabama




    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 VisionsHow 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 PositionedWho 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


    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


    Going on the OffensiveStrategic Options to Improve a Company'sMarket Position 215

    Choosing the Basis for Competitive Attack 216Choosing Which Rivals to Attack 218Blue-Ocean StrategyA Special Kind of Offensive 219

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    Defensive StrategiesProtecting 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 StrategyThink Local, Act Local 269Global StrategyThink Global, Act Global 271Transnational StrategyThink 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


    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


    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


    Where Do Ethical Standards Come FromAre 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


    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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