Walden University Business Ethics

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Walden University Business Ethics and Positive Social Change Paper

In this Assignment, you will create an inquiry/action model of education that fosters research, discovery, and critical thinking. This model should promote professional excellence through the application of business ethics from the perspective of independent scholars, reflective practitioners, and agents of positive social change.

To prepare for this Assignment, identify and research a business ethics crisis for scandal. You may want to review Chapter 13 and Case 13 of Dyer, Godfrey, Jensen, and Bryce (2016) for ideas, as well as the Walden Library databases. Consider how a strategic decision can negatively impact social change and how infusing ethics into business strategy can help prevent crises.

Submit a 5- to 7-page paper evaluating business ethics within the context of positive social change. Your evaluation should address the following:

  • What are the essential details of the event, and what do you see as the causes of the crisis and/or negative impact to society?
  • Where do you see failures in corporate governance?
  • What caused the failures in the ethical culture and climate of the company?
  • What ethical policy might prevent this scenario from occurring in the future?
  • If you were a leader within this company, what choices would you have made differently to effect positive social change?

Note: Be sure to use the APA Course Paper Template (6th ed.), found in this week’s Learning Resources, to complete this Assignment. Also, refer to the Week 6 Assignment Rubric for specific grading elements and criteria. Your Instructor will use this rubric to assess your work. Please Note: For each page of your paper, you must include a minimum of two APA-formatted scholarly citations.STRATEGIC Personalize with Your Notes MANAGEMENT CONCEPTS AND CASES JEFF DYER / PAUL GODFREY ROBERT JENSEN / DAVID BRYCE Carry What You Need Succeed Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 Page iv Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 Page i Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 Page ii In Praise of Strategic Management “Exciting, challenging, and well constructed” KALYAN CHAKRAVARTY, CALIFORNIA STATE UNIVERSITY, NORTHRIDGE “[The cases] are wide-reaching in terms of topics covered and can easily be used to illustrate a variety of theoretic concepts from strategy. I think they are all well-written and well-informed.” MEREDITH DOWNES, ILLINOIS STATE UNIVERSITY “Timely strategic issues; I can easily link the cases to the concepts.” KONGHEE KIM, ST. CLOUD STATE UNIVERSITY “It is a challenge to engage and show the application of strategy concepts to undergraduate students. This text…is an effective resource for meeting this challenge. They combine professional and succinct introductory videos with integrated chapter and case content to relate information in a way that is accessible to students.” DAVID KING, IOWA STATE UNIVERSITY “The authors have found a way to present the strategy concepts in a concise manner that is easy for modern day students to understand and relate.” LAKAMI BAKER, AUBURN UNIVERSITY “Quite an offering of ideas and insights that we want our students to dig in and reflect upon.” JOSEPH GOLDMAN, UNIVERSITY OF MINNESOTA “I appreciate the author’s ability to accurately describe the concepts while not losing the target audience in the process.” LUCAS HOPKINS, MIDDLE GEORGIA STATE COLLEGE “The book, overall, and individual chapters are exactly what I was looking for myself. It is a fresh breath with contemporary examples and a youthful tone.” M. NESIJ HUVAJ, SUFFOLK UNIVERSITY “Good illustration of practical insights… helpful tools for student learning.” DON OKHOMINA, FAYETTEVILLE STATE UNIVERSITY “I think students might find the content easy to read and understand. It might actually make the subject enjoyable for more students.” MITCHELL ADRIAN, MCNEESE STATE UNIVERSITY “The greatest strength is the combination of academic rigor and practical, consultinglike approach to strategic management.” HERVE QUENEAU, BROOKLYN COLLEGE “This project brings a refreshingly practical perspective to strategy, while not sacrificing rigor.” RAM SUBRAMANIAN, MONTCLAIR STATE UNIVERSITY Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 “It’s engaging for the students, has hands on strategy tools, and [is] loaded with examples.” EDWARD WARD, SAINT CLOUD STATE UNIVERSITY “Practical, applicable, rich with current examples. Well written and more professional than many.” KRISTIN BACKHAUS, SUNY NEW PALTZ “Clearly, the greatest strength is the uniqueness of the information as compared to other strategy texts.” BRIAN CONNELLY, AUBURN UNIVERSITY “A text on strategy written so that students can grasp the concepts better than most texts I have seen or used.” DON STULL, TEXAS TECH UNIVERSITY “My students embraced the contemporary examples utilized in the text, which help to explain concepts, the interesting and focused approach of the timely cases and the animated videos, which help explain the concepts. The text, the cases, and the accompanying animated videos provide effective approaches to support the different learning styles of the students.” JAMES GLASGOW, VILLANOVA UNIVERSITY “Excellent text. A great combination of conceptual material and business practices on Strategic Management for students in today’s global economy.” PETER PINTO, BOWLING GREEN STATE UNIVERSITY “The Dyer book is one of the best written I’ve seen, accessible to students and having great explanations. It also has cool animations.” JIM WEBER, ST. CLOUD STATE UNIVERSITY “The text clearly stands out for its concise approach to strategic business concepts. Illustrative graphs and charts compliment the straight-forward, interesting information.” JACK HOPKINS, CLEMSON UNIVERSITY “My students are pleased with the “real world,” be it examples or cases. They also appreciate the straight-forward approach of the authors. I concur with both observations and agree that “straight talk” and reality definitely create value in the classroom.” RICK SMITH, IOWA STATE UNIVERSITY “Perhaps the top benefits…are the innovative support materials. For example, the animated videos are a great way to wrap-up each lecture.” DAVID GRAS, TEXAS CHRISTIAN UNIVERSITY “This text provides excellent in-class exercises that provide hands on demonstration of strategic management concepts.” GEORGE MASON, PROVIDENCE COLLEGE Page iii Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 Page iv Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 STRATEGIC MANAGEMENT C O N C E P T S A N D T O O L S F O R C R E AT I N G R E A L W O R L D S T R A T E G Y JEFF DYER Brigham Young University, Marriott School PAUL GODFREY Brigham Young University, Marriott School ROBERT JENSEN Brigham Young University, Marriott School DAVID BRYCE Brigham Young University, Marriott School Page v Trim Size: 8.5 in X 11 in fm E-pub.indd VICE PRESIDENT & DIRECTOR George Hoffman EXECUTIVE EDITOR Lisé Johnson SPONSORING EDITOR Jennifer Manias MARKET SOLUTIONS ASSISTANT Amanda Dallas FREELANCE EDITOR Susan McLaughlin EDITORIAL OPERATIONS MANAGER Yana Mermel SENIOR CONTENT MANAGER Dorothy Sinclair SENIOR PRODUCTION EDITOR Suzie Chapman PRODUCT DESIGN MANAGER Allison Morris DESIGN DIRECTOR Harry Nolan SENIOR DESIGNER Thomas Nery SENIOR PHOTO EDITOR Billy Ray DIRECTOR OF MARKETING Amy Scholz EXECUTIVE MARKETING MANAGER Christopher DeJohn FREELANCE MARKETING SPECIALIST Kelly Simmons This book was set in 10/12 Kepler by SPi Global and printed and bound by Courier. The cover was printed by Courier. This book is printed on acid free paper. Founded in 1807, John Wiley & Sons, Inc. has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations. Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work. In 2008, we launched a Corporate Citizenship Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business. Among the issues we are addressing are carbon impact, paper specifications and procurement, ethical conduct within our business and among our vendors, and community and charitable support. For more information, please visit our website: www.wiley.com/go/citizenship. Copyright © 2016 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc. 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http://www.wiley.com/go/permissions. Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year. These copies are licensed and may not be sold or transferred to a third party. Upon completion of the review period, please return the evaluation copy to Wiley. Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel. If you have chosen to adopt this textbook for use in your course, please accept this book as your complimentary desk copy. Outside of the United States, please contact your local representative. ISBN 9781118976586 (Prelim) ISBN 9780470937389 (BRV) ISBN 9781119134756 (EVALC) ISBN 9781119134763 (Concepts BRV) Library of Congress Cataloging-in-Publication Data Dyer, Jeff (Professor of Strategy) Strategic management / Jeff Dyer, Paul Godfrey, Robert Jensen, David Bryce. 1 online resource. Includes index. Description based on print version record and CIP data provided by publisher; resource not viewed. ISBN 978-1-119-13495-4 (epub)—ISBN 978-0-470-93738-9 (looseleaf) 1. Strategic planning. I. Title. HD30.28 658.4’012—dc23 2015021543 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 04:47:56:PM 06/25/2015 Page vi Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 Page vii About the Authors JEFF DYER (Ph.D., UCLA, 1993) is the is the Horace Beesley Professor of Strategy at the Marriott School, BYU where he serves as Chair of the Department of Organizational Leadership and Strategy. Before joining BYU, Dr. Dyer was a professor at the University of Pennsylvania’s Wharton School where he maintains an adjunct professor position and continues to teach Executive MBAs. Dr. Dyer’s has considerable consulting experience, having spent 5 years working as a strategy consultant and manager at Bain & Company, where he consulted with such clients as Baxter International, Kraft, Maryland National Bank, and First National Stores. Since then he has been a consultant, speaker, or trainer for a variety of companies, including Adobe, AT&T, Cisco, General Electric, General Mills, Gilead Sciences, Harley-Davidson, Hewlett Packard, Intel, Johnson & Johnson, and Sony. Dyer is the only strategy scholar in the world to have published at least five times in the Harvard Business Review and five times in Strategic Management Journal, the top academic journal in the strategy field. In 2012, he was ranked the world’s #1 “most influential” management scholar among scholars who completed their Ph.D.s after 1990. This ranking, published in Academy of Management Perspectives, was based upon an equal weighting of academic citations (academic influence) and non-“.edu” Google searches (business influence). His recent book, The Innovator’s DNA, is a business best seller and has been published in 13 languages, and his new book, The Innovator’s Method, has already hit top 10 business bestseller lists. PAUL C. GODFREY (Ph.D., Washington, 1994) currently serves as the William and Roceil Low Professor of Business Strategy in the Marriott School of Management at Brigham Young University. Paul teaches classes to BYU undergraduates, as well as MBA and Executive MBA students, and he was honored in 2013 with the Marriott School’s Teaching Award. His research has appeared in the Academy of Management Review, the Strategic Management Journal, the Journal of Business Ethics, and the Journal of Management Inquiry. He has recently published a book on eliminating poverty with Stanford University Press. He has also co-edited two other books and served as a special issue editor for two academic journals. He currently serves as Associate Academic Director of the Economic Self-Reliance Center at the Marriott School, and he has been working with Habitat for Humanity of Utah County for the past 18 months in refining their strategic plan. Paul received his MBA and PhD degrees from the University of Washington and a Bachelor of Science degree in Political Science from the University of Utah. ROBERT J. JENSEN (Ph.D., Wharton, 2006) serves as the Whitman Faculty and Peery Research Fellow Associate Professor of Strategy and International Business at the Marriott School, BYU. Robert teaches undergraduate classes in Strategy and Global Strategy and Master’s Degree classes in Strategy. He has published in many of the top management journals, including Strategic Management Journal, Organization Science, Management Science, and the Journal of International Business Studies (where he currently serves on the editorial review board). His professional awards include the McKinsey & Company/ SMS Best Conference Paper prize, honorable mention; finalist for both the Blackwell Best Dissertation Prize from the Academy of Management, and the William H. Newman Best Paper from a Dissertation award, and runner up for the Booz Allen Hamilton/SMS Ph.D. fellowship. His work was honored as the best paper published in Competitiveness Review in 2009, and his papers have been selected seven times for the best paper proceedings of the Academy of Management. DAVID J. BRYCE (Ph.D., Wharton, 2003) is Associate Professor of Organizational Leadership and Strategy at the Marriott School of Management and has been an adjunct Associate Professor of Management at the Wharton School where he has taught strategy in the MBA program for executives. David earned a Ph.D. in strategy and applied economics from the Wharton School and is author on a number of thought-leading articles for senior executives, including articles in the Harvard Business Review. He conducts research in the area of corporate strategy and has published in top academic journals such as Management Science and Organization Science. For more than 20 years, he has served as consultant on important strategic challenges to executives of start-ups, mid-market companies, and major corporations, including Eli Lilly, Prudential, Procter & Gamble, Microsoft, Johnson & Johnson, and the LG Group. He has worked with clients on enterprise strategy, new market entry, branding, pricing, positioning, and growth. He has also conducted many strategy-oriented leadership training sessions over the past 10 years within the Fortune 50, including extensively at Microsoft. Prior to his academic career, he held partner, vice president, and other senior positions at several global management consulting firms. [ vii ] Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 Page viii Preface Why does the world need another strategy textbook? The answer is that we simply have not been able to find a textbook that we felt fully met the needs of our students. What are those needs? First, we wanted to write a textbook that would engage students’ interest using numerous practical examples and tools that would help them actually DO analysis to answer key strategic questions. For example, leading firms and strategy consulting firms have tools to teach strategists how to actually conduct a “5 Forces” analysis, calculate a scale or experience curve, or conduct a net promoter score analysis. We wanted to provide those tools. We also wanted to create interactive learning tools that would connect with a new generation of learners. This meant we needed to provide interactive digital learning experiences such as the “white board” animated videos that we have created to support our textbook. When students are more engaged, they learn more—and they enjoy it more! Not surprisingly, this increases student satisfaction with the course and the professor. As we looked at how we could create an enjoyable and engaging strategy course learning experience, we realized as an author group that we were somewhat uniquely qualified to create that type of experience. Why? Because we collectively have over 13 years of full-time management consulting experience at top consulting firms. Why does this matter? Because we have practical experience applying strategy concepts and tools to real companies—practical experience that we have embedded in this textbook. Perhaps just as important, we know how to write to a management audience, having published three books targeting a practitioner audience, seven articles in Harvard Business Review, and another four articles in Sloan Management Review. Perhaps most important is the fact that we’ve tested the text, cases, video animations, and strategy tools with large groups of business students at BYU and Wharton over the past 10 years—with remarkable results. Average student satisfaction ratings have been 6.6/7.0 across multiple instructors for strategy courses using our materials. The bottom line is that we see better student satisfaction and higher teaching ratings because of using this material. In just the past year, we have class tested Strategic Management at over 40 institutions with over 900 students. In exit surveys, 76% of students rated the experience as positive or very positive. A few of their quotes are in the margin below. Key Book Differentiators Because this is a strategy book, we should tell you that our strategy in writing this book is to offer unique value. The key differentiators of this book can be summarized with the acronym TACT—Text, Animated Executive Summary Videos, Cases, and Tools. MY FAVORITE ASPECT WAS THE EXAMPLES USED TO EXPLAIN THE CONCEPTS. IT REALLY HELPED ME UNDERSTAND THE MATERIAL. –BILL BOCHICCHIO, STUDENT, VILLANOVA UNIVERSITY THE WHITEBOARD ANIMATIONS WERE VERY ENTERTAINING AND HELPED EXPLAIN SOME OF THE CONCEPTS IN REAL LIFE SITUATIONS. –CAMERON LANDRY, STUDENT, MCNEESE STATE UNIVERSITY 1 Text. Each of our chapters is written in an accessible Harvard Business Review style with lots of practical examples, and each chapter is roughly 20 percent shorter than the chapters of the average strategy textbook. You can assign the whole chapter (not just a few pages) and feel confident that your students will not perceive it as a waste of time. This is not to say that we haven’t included core strategy concepts, frameworks, and theories. They are all there. Animated Executive Summary Videos. Each chapter is accompanied by at least one 8-10 minute animated video that brings the content to life. Today’s students love to learn through interactive technology, and student response to our animated videos has been positively off-the-charts. Research shows that student recall increases by more than 15 percent when material is presented with a white board animation versus a typical talking head lecture.1 These animated videos allow you to flip the classroom. When students Study by Richard Wiseman. Available at http://www.sparkol.com/blog/how-scribe-videos-increase-your-studentslearning-by-15/ [ viii ] Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 PREFACE Page ix [ ix ] view the videos before class, they get the core concepts in a memorable way. Then you have more time to discuss questions and help them deeply understand and synthesize the concepts and tools. Cases. We will admit that differentiating cases isn’t easy, but we think we’ve done a few things to make using our cases easier. Our cases offer new, shortened, and updated “classic” cases on familiar companies (e.g., Walmart, Coke and Pepsi, Intel, Southwest, Nike, etc.). If you build your course around these cases, you’ll experience very low switching costs moving to our book. We’ve also written cases on companies and topics that millennials gravitate to such as Amazon, Harley-Davidson, Skype, Netflix/Redbox/ Hulu, Samsung, and the AT&T-Apple alliance. We also provide brief Case Notes and PowerPoint presentations to summarize key takeaways for each case. THE CASES WERE MY FAVORITE PART—UNDERSTANDING REAL WORLD EXAMPLES HELPED PUT THINGS INTO PROPER PERSPECTIVE. Tools. Almost every chapter will offer a “Strategy Tool” to teach students how to apply a theory, framework, or concept. Students will feel like they have learned how to DO something—actually conduct analysis that will help with strategic decisions. Some of these tools are used in Fortune 500 companies and in strategy consulting firms such as Bain, BCG, and McKinsey when they do strategy analysis for clients. For example, the book shows the student how to assess the attractiveness of an industry, how to calculate and use a scale or experience curve, how to create a net promoter score to assess whether a differentiation strategy is working, and how to decide whether to “make” versus “buy.” Many of the end-of-chapter cases integrate the strategy tool into the case so you can easily have students apply the tool as they analyze the case. Our students tell us that these tools help them feel that they are acquiring useful analytical skills to help them in making strategic decisions. I LIKED THE EXAMPLES AND THEIR OVERALL RELEVANCE. I ALSO LIKED THE STRATEGIC TOOLS AND THE EXPLANATIONS. We think the combination of well-conceived and executed Text, Animated Executive Summary Videos, Cases, and Tools can dramatically improve student satisfaction with your strategy course. Indeed, a random sample of strategy professors who reviewed our text book preferred it over their current textbooks by almost 4:1. That’s a pretty powerful endorsement. So, does the world need another strategy text? We answer “yes,” and we offer one that provides students with a well-designed, engaging, and learning-rich combination of TACT: Text, Animated Executive Summary Videos, Cases, and Tools. We’ve also found that, when our students enjoy their courses, we enjoy teaching much more. Student and Instructor Resources Companion Website. The Strategic Management Website at http://www.wiley.com/ college/dyer contains myriad tools and links to aid both teaching and learning, including resources listed here. Teaching Notes. The Teaching Notes offer helpful teaching ideas. They offer chapterby-chapter text highlights, learning objectives, chapter outlines, and answers to end-ofchapter material. Case Notes. Written for each case presented with Strategic Management, each Case Note includes a brief case summary, learning objectives for the instructor, learning outcomes for the students, and a brief teaching plan with questions and answers. In addition, we’ve provided a matrix showing alternative teaching approaches for each case. Test Bank. This comprehensive Test Bank contains nearly 100 questions per chapter. The multiple-choice, fill-in, and short-essay questions vary in degree of difficulty. All questions are tagged with learning objectives, Bloom’s Taxonomy categories, and AACSB Standards. The Computerized Test Bank allows instructors to modify and add questions to the master bank and to customize their exams. In addition, a Respondus Test Bank is available for use with learning management systems. PowerPoint Presentation Slides. This robust set of slides for chapters and cases can be accessed on the instructor companion site. Lecture notes accompany most slides. A set of slides without lecture notes is available on the student companion site. – PHILIP SIEKMANN, STUDENT, PENNSYLVANIA COLLEGE OF TECHNOLOGY –DAVID GRANTHAM, STUDENT, KENNESAW STATE UNIVERSITY I FOUND IT TO BE A VERY EASY READ. IT WAS ONE OF THE FEW BUSINESS TEXTBOOKS THAT I ENJOYED READING WHICH MADE LEARNING EASIER AND MORE FUN. –TAYLOR LEE, STUDENT, SAN JOSE STATE UNIVERSITY Trim Size: 8.5 in X 11 in [x] fm.indd 11:8:14:PM 05/22/2015 Page x PREFACE WileyPLUS Learning Space The factors that contribute to success—both in college and in life—aren’t comprised of intellectual capabilities alone. In fact, there are other traits, strategies, and even daily habits that contribute to the overall picture of success. Studies show that people who can delay instant gratification, work through tasks even if they are not immediately rewarding, and follow through with a plan have the skills that are not only valuable in the classroom, but also in the workplace and their personal lives. A place where students can define their strengths and nurture these skills, WileyPLUS Learning Space transforms course content into an online learning community. WileyPLUS Learning Space invites students to experience learning activities, view animations, work through self-assessment, ask questions and share insights. As they interact with the course content, peers and their instructor, WileyPLUS Learning Space creates a personalized study guide for each student. As research shows, when students collaborate with each other, they make deeper connections to the content. When students work together, they also feel part of a community so that they can grow in areas beyond topics in the course. With WileyPLUS Learning Space, students are invested in their learning experience and can use their time efficiently as they develop skills like critical thinking and teamwork. Through a flexible course design, you can quickly organize learning activities, manage student collaboration, and customize your course—having full control over content as well as the amount of interactivity between students. WileyPLUS Learning Space lets you: rAssign activities and add your own materials rGuide your students through what’s important in the interactive e-textbook by easily assigning specific content rSet up and monitor group learning rAssess student engagement rGain immediate insights to help inform teaching Defining a clear path to action, the visual reports in WileyPLUS Learning Space help both you and your students gauge problem areas and act on what’s most important. With the visual reports, you can: rSee exactly where your students are struggling for early intervention rHelp students see exactly what they don’t know to better prepare for exams rGive students insight into their strengths and weaknesses so that they can succeed in your course Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 Page xi Acknowledgements Writing a book is a daunting task, and we’ve had much help in this process. We thank our colleagues in the Academy for years of interactions too numerous to mention, but each of which enlarged our view and clarified our understanding of how to teach strategy most effectively. Thanks to our colleagues and our students at BYU and the Wharton School for their excellent feedback on drafts of our book. Their insightful comments on the text, animations, cases, and tools brought gaps and holes to light that we would have missed. Thank you to James Aida, Preston Alder, David Benson, Jared Brand, Tyler Cornaby, Caleb Flint, Mark Hansen, Michael Hendron, Bryson Hilton, Chad Howland, Benjamin King, David Kryscynski, Jake Lundin, Christian Mealey, Matthew Moen, Kyle Nelson, Lee Perry, and Erin Pew for their research and assistance writing the cases. We gratefully acknowledge the advice, cooperation, wisdom, and work of the team at John Wiley who shepherded this book from its inception to its publication. Executive Editor Lisé Johnson, Sponsoring Editor Jennifer Manias, Freelance Editor Susan McLaughlin, Product Design Manager Allison Morris, and Marketing Managers Christopher DeJohn and Kelly Simmons have all taught us about the process of bringing such a massive undertaking to fruition. Their professionalism has enriched the content of the book and our own lives, and their patience with us as we moved through the process has been inspiring. In addition, we’d like to thank the remainder of the team at Wiley: Thomas Nery, Suzie Chapman, Billy Ray, Elena Santa Maria, and Amanda Dallas. Finally, we’d like to thank the numerous reviewers who have contributed valuable time and incredible feedback: Reviewers Joshua Aaron, East Carolina University Mitchell Adrian, McNeese State University A D Amar, Seton Hall University Kristin Backhaus, SUNY New Paltz Chip Baumgardner, Penn College Brian Boyd, Arizona State University Luke Cashen, Nicholls State University Kalyan Chakravarty, California State University, Northridge Brian Connelly, Auburn University Kristal Davison, University of Mississippi Meredith Downes, Illinois State University Linda Edelman, Bentley University James Fiet, University of Louisville Quentin Fleming, University of South Carolina William Forster, Lehigh University Donna Galla, American Military University Joseph Goldman, University of Minnesota John Guarino, Averett University William Hayden, SUNY Buffalo Michael Hennelly, West Point Tim Holcomb, Florida State University Lucas Hopkins, Middle Georgia State University David Hover, San Jose State University M. Nesij Huvaj, University of Connecticut Joy Karriker, East Carolina University Richard Kernochan, California State University, Northridge Konghee Kim, St. Cloud State University John Lipinski, Middle Tennessee State University Al Lovvorn, The Citadel Dali Ma, Drexel University Tatiana Manilova, Bentley University Ismatilla Mardanov, Southeast Missouri State University Daniel Marrone, Farmingdale State College Michael McDermott, Northern Kentucky University Ghoreishi Minoo, Millersville University Mike Montalbano, Bentley University John Morris, Oregon State University Patricia Norman, Baylor University William Norton, Georgia Southern University Roman Nowacki, Northern Illinois University Don Okhomina, Fayetteville State University Hugh O’Neill, University of North Carolina Christopher Penney, Mississippi State University Peter Pinto, Bowling Green University Herve Queneau, Brooklyn College Amit Shah, Frostburg State University James Spina, University of Maryland Don Stull, Texas Tech University Ram Subramanian, Montclair State University Charles Wainwright, Belmont University Jorge Walter, Portland State University Edward Ward, St. Cloud State University Paula Weber, St. Cloud State University Yanli Zhang, Montclair State University Focus Group Participants Mitchell Adrian, McNeese State University Frances Amatucci, Slippery Rock University of Pennsylvania [ xi ] Trim Size: 8.5 in X 11 in [ xii ] fm.indd 11:8:14:PM 05/22/2015 ACKNOWLEDGEMENTS Elsa Anaya, Palo Alto Community College Bindu Arya, University of Missouri, St Louis Koren Borges, University of North Florida Kalyan Chakravarty, California State University, Northridge Larry Chasteen, University of Texas, Dallas William Forster, Lehigh University Dean Frost, Bemidji State University Anne Fuller, California State University, Sacramento Donna Galla, American Military University Lucas Hopkins, Middle Georgia State University Dawn Keig, Brenau University Vance Lewis, University of Texas, Dallas Sali Li, University of South Carolina John Lipinski, Middle Tennessee State University Cindy Liu, Cal State Polytechnic University Daniel Marrone, Farmingdale State College Don Okhomina, Fayetteville State University Michael Provitera, Barry University Herve Queneau, Brooklyn College Timothy Rogers, Ozarks Tech Community College Veronica Rosas-Tatum, Palo Alto Community College Mark Ryan, Hawkeye Community College Stephen Takach, University of Texas, San Antonio Beverly Tyler, North Carolina State University Edward Ward, St. Cloud State University James Weber, St. Cloud State University Carol Young, Metropolitan State University Wiley Technology Summit Participants Lakami Baker, Auburn University Brent Beal, University of Texas, Tyler Larry Chasteen, University of Texas, Dallas Dean Frost, Bemidji State University Stephen Hallam, University of Akron David King, Iowa State University Donald Kopka, Towson University Marie Milena Loubeau, Miami Dade College Don Okhomina, Fayetteville State University Thomas Shirley, San Jose State University Thomas Swartwood, Drake University Class Testers Mitchell Adrian, McNeese State University Rajshree Agarwal, University of Maryland, College Park Francis Amatucci, Slippery Rock University Jeff Bailey, University of Idaho Lakami Baker, Auburn University Chip Baumgardner, Penn College Brent Beal, University of Texas, Tyler Gregory Blundell, Kent State University, Kent John Buttermore, Slippery Rock University McKay Christensen, Brigham Young University Daniel Connors, Providence College Dean Frost, Bemidji State University James Glasglow, Villanova University David Gras, Texas Christian University John Guarino, Averett University Uma Gupta, Buffalo State University Stephen Hallam, University of Akron John Hopkins, Clemson University Paul Hudec, Wisconsin School of Engineering David King, Iowa State University Donald Kopka, Towson State University David Kryscynski, Brigham Young University Martin Lewison, Farmingdale State College George Mason, Providence College Stuart Napshin, Kennesaw State University Scott Newbert, Villanova University Roman Nowacki, Northern Illinois University Don Okhomina, Fayetteville State University Paulo Prochno, University of Maryland, College Park Rhonda Rhodes, Cal Poly Pomona William Ritchie, James Madison University Douglas Sanford, Towson University Ben Shaffer, University of Wisconsin, Milwaukee Lois Shelton, California State University, Northridge Thomas Shirley, San Jose State University Richard Smith, Iowa State University Roger Strickland, Santa Fe College Thomas Swartwood, Drake University Ram Subramanian, Montclair State University Xiwei Yi, University of Houston, Downtown Yuping Zeng, Southern Illinois University, Edwardsville Student Focus Group Participants Rachel Abel, Auburn University William Annan, Villanova University Andrea Arbon, Brigham Young University Vincent Arrington, McNeese State University Brian Basili, Villanova University Kelly Becker, Clemson University Cody Brackett, Iowa State University Doreen Compher, The University of Akron Lincoln Eppard, Iowa State University Laura Eppley, Kent State University Hannah Gay, University Wisconsin, Milwaukee Yuliya Gitman, Drake University Laura Jones, University of Texas at Tyler Daniel Larsen, Iowa State University Tyler Look, Auburn University Miranda Matuke, Bemidji State University Michael Minocchi, Kent State University Monica Ghadiyaram, Virginia Tech Moriah Mitsuda, Brigham Young University Ashley Mueller, University Wisconsin, Milwaukee Rebeka Perkins, Santa Fe College Zaineb Sehgal, University of Texas at Tyler Bryttan Thompson, Iowa State University Mythy Tran, Santa Fe College Taylor VanDevender, McNeese State University Corrie VanDyke, Clemson University Kelsey Vetter, Iowa State University Christopher Wahl, Drake University Courtney Weiner, Towson University Stew Williamson, Brigham Young University Sarah Wright, The University of Akron Lynn Wu, Virginia Tech Page xii Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 Page xiii Brief Contents SECTION I: OVERVIEW Chapter 01: What Is Business Strategy? 2 SECTION II: EXTERNAL ENVIRONMENT Chapter 02: Analysis of the External Environment: Opportunities and Threats 20 SECTION III: THE NATURE OF BUSINESS UNIT COMPETITIVE ADVANTAGE Chapter 03: Internal Analysis: Strengths, Weaknesses, and Competitive Advantage Chapter 04: Cost Advantage Chapter 05: Differentiation Advantage 46 66 86 SECTION IV: CORPORATE LEVEL STRATEGIES Chapter 06: Corporate Strategy Chapter 07: Vertical Integration and Outsourcing Chapter 08: Strategic Alliances Chapter 09: International Strategy 106 128 146 168 SECTION V: STRATEGY IN DYNAMIC ENVIRONMENTS Chapter 10: Innovative Strategies That Change the Nature of Competition Chapter 11: Competitive Strategy 194 214 SECTION VI: MAKING AND IMPLEMENTING STRATEGY Chapter 12: Implementing Strategy Chapter 13: Corporate Governance and Ethics Chapter 14: Strategy and Society 236 256 274 CASEBOOK CASE 01: Walmart Stores: Gaining and Sustaining Competitive Advantage CASE 02: Coca-Cola and Pepsi: The Shifting Landscape of the Carbonated Soft Drink Industry CASE 03: Intel (A): Dominance in Microprocessors CASE 04: Southwest Airlines: Flying High with Low Costs CASE 05: Harley-Davidson: Growth Challenges Ahead CASE 06: Intel (B): Responding to the Smart Phone Threat CASE 07: Nike: Sourcing and Strategy in Athletic Footwear CASE 08: AT&T and Apple: a Strategic Alliance CASE 09: Samsung: Overtaking Philips, Panasonic, and Sony as the Leader in the Consumer Electronics Industry CASE 10: New Business Models: Netflix, Redbox, Hulu, and Others in Home Movie Entertainment CASE 11: Smartphone Wars CASE 12: Lincoln Electric: Aligning for Global Growth CASE 13: Corporate Governance and Ethics: A Series of Decisions CASE 14: Safe Water Network: Mastering the Model at Dzemeni CASE 15: Walmart versus Amazon.com (recommended for Chapters 1, 3, 4, 11) CASE 16: Skype: Competing with Free (recommended for Chapters 10, 4, 11) CASE 17: Sears: In Need of a Turnaround Strategy (recommended for Chapter 13) C-2 C-12 C-22 C-32 C-45 C-54 C-62 C-70 C-82 C-92 C-101 C-112 C-119 C-121 C-132 C-142 C-152 [ xiii ] Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 Page xiv Contents SECTION I: OVERVIEW CHAPTER 01: WHAT IS BUSINESS STRATEGY? 2 STRATEGY AT APPLE 4 OVERALL INDUSTRY ATTRACTIVENESS 33 WHAT IS BUSINESS STRATEGY? 5 Competitive Advantage 6 Strategy in Practice: Measuring American Home Products’ Competitive Advantage 6 The Strategic Management Process 7 WHAT INFORMATION AND ANALYSIS GUIDES STRATEGY FORMULATION? 10 Mission 10 External Analysis 10 Internal Analysis 11 Strategy in Practice: Apple’s Evolving Mission 11 HOW ARE STRATEGIES FORMULATED? 12 Strategy Vehicles for Achieving Strategic Objectives 12 Strategy Implementation 13 WHO IS RESPONSIBLE FOR BUSINESS STRATEGY? 14 Strategy in Practice: Walmart Functional Strategies Implement the Overall Strategy 14 Who Benefits from a Good Business Strategy? 15 Ethics and Strategy: The Price Companies Pay to Stay Competitive 15 Why You Need to Know Business Strategy 16 ìSUMMARY 16 ìKEY TERMS 17 ìREVIEW QUESTIONS 17 ìAPPLICATION EXERCISES 18 ìREFERENCES 18 SECTION II: EXTERNAL ENVIRONMENT CHAPTER 02: ANALYSIS OF THE EXTERNAL ENVIRONMENT: OPPORTUNITIES AND THREATS 20 NOKIA AND THE SMARTPHONE INDUSTRY 22 DETERMINING THE RIGHT LANDSCAPE: DEFINING A FIRM’S INDUSTRY 23 Strategy in Practice: How the U.S. Government Defines Industries 24 FIVE FORCES THAT SHAPE AVERAGE PROFITABILITY WITHIN INDUSTRIES 25 Rivalry: Competition among Established Companies 26 [ xiv ] Buyer Power: Bargaining Power and Price Sensitivity 28 Supplier Bargaining Power 29 Threat of New Entrants 30 Threat of Substitute Products 32 HOW THE GENERAL ENVIRONMENT SHAPES FIRM AND INDUSTRY PROFITABILITY 34 Complementary Products or Services 35 Technological Change 35 General Economic Conditions 36 Demographic Forces 37 Ecological/Natural Environment 37 Global Forces 38 Political, Legal, and Regulatory Forces 38 Social/Cultural Forces 38 ìSUMMARY 39 ìKEY TERMS 39 ìREVIEW QUESTIONS 39 ìAPPLICATION EXERCISES 40 ìSTRATEGY TOOL: EVALUATING INDUSTRY ATTRACTIVENESS USING PORTER’S FIVE FORCES MODEL 40 REFERENCES 44 ì SECTION III: THE NATURE OF BUSINESS UNIT COMPETITIVE ADVANTAGE CHAPTER 03: INTERNAL ANALYSIS: STRENGTHS, WEAKNESSES, AND COMPETITIVE ADVANTAGE 46 DISNEY: NO MICKEY MOUSE COMPANY 48 THE VALUE CHAIN 49 THE RESOURCE-BASED VIEW 50 Resources 50 Capabilities 51 Priorities 52 Strategy in Practice: Preserving Disney’s Capabilities: Don’t Mess with the Mouse! 52 CREATING A SUSTAINABLE COMPETITIVE ADVANTAGE: THE VRIO MODEL OF SUSTAINABILITY 53 Strategy in Practice: Values and Priorities at Pixar 53 Value 54 Rarity 54 Inimitability 54 Ethics and Strategy: Nondisclosure, Noncompete, and Resource Protection 55 Organized to Exploit 57 Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 CONTENTS Assessing Competitive Advantage with VRIO 57 Strategy in Practice: Disney Responds to a Competitive Threat 58 WHAT IS PRODUCT DIFFERENTIATION? 89 SOURCES OF PRODUCT DIFFERENTIATION 89 Different Product/Service Features 90 Quality or Reliability 92 Convenience 92 Ethics and Strategy: At What Point Does Marketing Become Lying? 93 Brand Image 94 66 ECONOMIES OF SCALE AND SCOPE 69 Ability to Spread Fixed Costs of Production 70 Ability to Spread Nonproduction Costs 70 Specialization of Machines and Equipment 70 Specialization of Tasks and People 71 Evaluating Economies of Scale: The Scale Curve 71 Strategy in Practice: The Downside of Size and Scale in the Airline Industry 72 Economies of Scope 73 LEARNING AND EXPERIENCE 73 The Learning Curve 74 The Experience Curve 74 Experience Curves and Market Share 75 Strategy in Practice: The Relationship Between Market Share and Profitability in Retail Industries 76 How Strategists Use the Scale and Experience Curves to Make Decisions 77 Proprietary Knowledge 78 DIFFERENT BUSINESS MODEL OR VALUE CHAIN 80 Eliminating Steps in the Value Chain 81 Performing Completely New Activities 81 Revisiting Tata 81 ìSUMMARY 81 ìKEY TERMS 82 ìREVIEW QUESTIONS 82 ìAPPLICATION EXERCISES 83 ìSTRATEGY TOOL: HOW TO CALCULATE A SCALE CURVE OR EXPERIENCE CURVE 83 REFERENCES 84 ì 86 THE RISE OF FACEBOOK 88 THE WORLD’S CHEAPEST CAR 68 LOWER INPUT COSTS 79 Bargaining Power over Suppliers 79 Cooperation with Suppliers 79 Location Advantages 80 Preferred Access to Inputs 80 [ xv ] CHAPTER 05: DIFFERENTIATION ADVANTAGE THE COMPANY DIAMOND: A TOOL FOR ASSESSING COMPETITIVE ADVANTAGE 59 Gathering Data for Company Diamond Analysis 60 Using the Company Diamond 60 ìSUMMARY 62 ìKEY TERMS 63 ìREVIEW QUESTIONS 63 ìAPPLICATION EXERCISE 63 ìREFERENCES 64 CHAPTER 04: COST ADVANTAGE Page xv HOW TO FIND SOURCES OF PRODUCT DIFFERENTIATION 94 Customer Segmentation 94 Mapping the Consumption Chain 97 BUILDING THE RESOURCES AND CAPABILITIES TO DIFFERENTIATE 100 Assessing Differentiation Performance 101 Strategy in Practice: How Starbucks Built the Resources to Differentiate 101 ìSUMMARY 102 ìKEY TERMS 102 ìREVIEW QUESTIONS 103 ìAPPLICATION EXERCISES 103 ìSTRATEGY TOOL: THE NET PROMOTER SCORE 103 ìREFERENCES 104 SECTION IV: CORPORATE LEVEL STRATEGIES CHAPTER 06: CORPORATE STRATEGY 106 CISCO SYSTEMS: GROWTH THROUGH DIVERSIFICATION AND ACQUISITION 108 CORPORATE VERSUS BUSINESS UNIT STRATEGY 109 CREATING VALUE THROUGH DIVERSIFICATION 110 Levels of Diversification 110 Value Creation: Exploit and Expand Resources and Capabilities 111 The Six Ss 112 Strategy in Practice: Creating Value at Newell Rubbermaid 113 Strategy in Practice: The Challenges of a Conglomerate: ITT Industries 114 Destroying Value Through Diversification 115 METHODS OF DIVERSIFICATION 117 THE ACQUISITION AND INTEGRATION PROCESS 118 Making the Acquisition 118 Integrating the Target 119 Ethics and Strategy: Transparency During the Acquisition Process 120 Trim Size: 8.5 in X 11 in [ xvi ] fm.indd 11:8:14:PM 05/22/2015 Page xvi CONTENTS Strategy in Practice: How GE Integrates Acquisitions 123 Joint Venture 153 Vertical and Horizontal Alliances 153 Strategy in Practice: Bose: Working with Suppliers in Vertical Alliances 154 ìSUMMARY 123 ìKEY TERMS 124 ìREVIEW QUESTIONS 125 ìAPPLICATION EXERCISES 125 ìREFERENCES 125 CHAPTER 07: VERTICAL INTEGRATION AND OUTSOURCING 128 DELL AND ASUS: A TALE OF TWO COMPANIES 130 WHAT IS VERTICAL INTEGRATION? 131 The Value Chain 131 Forward Integration and Backward Integration 132 THREE KEY REASONS TO VERTICALLY INTEGRATE 133 Capabilities 133 Coordination 134 Control 136 DANGERS OF VERTICAL INTEGRATION 137 Loss of Flexibility 137 Strategy in Practice: A Classic “Make vs. Buy” Mistake 137 Loss of Focus 138 ADVANTAGES OF OUTSOURCING 139 Ethics and Strategy: Should You Outsource to Subcontractors that Use Child Labor? 139 Strategy in Practice: Outsourcing via Crowdsourcing 140 DANGERS OF OUTSOURCING 141 Strategy in Practice: How to Prevent a Subcontractor from Becoming a Competitor 142 ìSUMMARY 142 ìKEY TERMS 143 ìREVIEW QUESTIONS 143 ìAPPLICATION EXERCISES 143 ìSTRATEGY TOOL: MAKE VERSUS BUY ASSESSMENT 144 ìREFERENCES 144 CHAPTER 08: STRATEGIC ALLIANCES 146 TOKYO DISNEYLAND 148 WAYS TO CREATE VALUE IN ALLIANCES 155 Combine Unique Resources 155 Pool Similar Resources 156 Strategy in Practice: General Motors’ Learning Alliance with Toyota 156 Create New, Alliance-Specific Resources 157 Lower Transaction Costs 157 THE RISKS OF ALLIANCES 158 Hold-Up 158 Misrepresentation 158 Building Trust to Lower the Risks of Alliances 158 Ethics and Strategy: The Blame Game in Strategic Alliances 159 BUILDING AN ALLIANCE MANAGEMENT CAPABILITY 161 Improves Knowledge Management 161 Increases External Visibility 161 Provides Internal Coordination 162 Facilitates Intervention and Accountability 162 ìSUMMARY 163 ìKEY TERMS 163 ìREVIEW QUESTIONS 164 ìAPPLICATION EXERCISES 164 ìSTRATEGY TOOL: WHEN TO CHOOSE AN ALLIANCE VERSUS AN ACQUISITION 165 ìREFERENCES 166 CHAPTER 09: INTERNATIONAL STRATEGY 168 LINCOLN ELECTRIC LEARNS SOME DIFFICULT LESSONS 170 THE GLOBALIZATION OF BUSINESS 171 WHY FIRMS EXPAND INTERNATIONALLY 173 Growth 173 Efficiency 173 Managing Risk 174 Knowledge 174 Responding to Customers or Competitors 175 WHAT IS A STRATEGIC ALLIANCE? 149 Choosing an Alliance 150 Strategy in Practice: Walt Disney and Oriental Land: Why Ally? 151 WHERE FIRMS SHOULD EXPAND 175 Cultural Distance 177 Administrative Distance 177 Geographic Distance 178 Economic Distance 178 TYPES OF ALLIANCES 152 Nonequity or Contractual Alliance 152 Equity Alliance 153 HOW FIRMS COMPETE INTERNATIONALLY 179 Strategy in Practice: How Coca-Cola Manages Economic Distance in Ghana 179 Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 CONTENTS Multidomestic Strategy—Adapt to Fit the Local Market 180 Strategy in Practice: National Competitive Advantage 181 Global Strategy—Aggregate and Standardize to Gain Economies of Scale 182 Arbitrage Strategy 183 Ethics and Strategy: Is Economic Arbitrage Ethical? Won’t It Lead to Worker Exploitation? 183 Combining International Strategies 184 HOW A FIRM GETS INTO A COUNTRY: MODES OF ENTRY 185 Exporting 185 Licensing and Franchising 185 Alliances and Joint Ventures 186 Wholly Owned Subsidiaries 187 Choosing a Mode of Entry 187 ìSUMMARY 188 ìKEY TERMS 188 ìREVIEW QUESTIONS 189 ìAPPLICATION EXERCISES 189 ìSTRATEGY TOOL: THE INTERNATIONAL STRATEGY TRIANGLE—DETERMINING WHICH STRATEGY TO USE 190 ìREFERENCES 192 [ xvii ] Strategy in Practice: Where Do Innovative Strategies Come From? 207 Hypercompetition: The Accelerating Pace of Innovation 209 INNOVATION AND THE PRODUCT/BUSINESS/ INDUSTRY LIFE CYCLE (S-CURVE) 209 Introduction Stage 209 Growth Stage 209 Maturity Stage 209 Decline Stage 210 ìSUMMARY 211 ìKEY TERMS 212 ìREVIEW QUESTIONS 211 ìAPPLICATION EXERCISES 212 ìREFERENCES 212 CHAPTER 11: COMPETITIVE STRATEGY 214 DELTA SIMPLIFIES ITS FARES 216 UNDERSTANDING THE COMPETITIVE LANDSCAPE 217 Strategic Groups and Mobility Barriers 217 Strategy Canvas 219 Strategy in Practice: A Real-World Strategic Group Map 220 EVALUATING THE COMPETITION 221 What Drives the Competitor? 221 What Is the Competitor Doing or Capable of Doing? 222 How Will a Competitor Respond to Specific Moves? 222 Using Game Theory to Evaluate Specific Moves 222 SECTION V: STRATEGY IN DYNAMIC ENVIRONMENTS CHAPTER 10: INNOVATIVE STRATEGIES THAT CHANGE THE NATURE OF COMPETITION Page xvii 194 INNOVATIVE STRATEGIES IN HOME MOVIE ENTERTAINMENT 196 WHAT IS AN INNOVATIVE STRATEGY? 197 Incremental versus Radical Innovation. 197 Strategy in Practice: Understanding Business Models 199 CATEGORIES OF INNOVATIVE STRATEGIES 200 Reconfiguring the Value Chain to Eliminate Activities (Disintermediation) 200 Low-End Disruptive Innovations 201 Strategy in Practice: The Internet as a “Disruptive” Technology 202 High-End/Top-Down Disruptive Innovations 203 Strategy in Practice: Why Incumbents Don’t Respond Effectively to Low-End Disruptions 204 Reconfiguring the Value Chain to Allow for Mass Customization 205 Blue Ocean Strategy—Creating New Markets by Targeting Nonconsumers 205 Free Business/Revenue Models 206 PRINCIPLES OF COMPETITIVE STRATEGY 226 Ethics and Strategy: Is Collusion Ethical? 226 Know Your Strengths and Weaknesses 227 Bring Strength against Weakness 227 Protect and Neutralize Vulnerabilities 228 Develop Strategies That Cannot Be Easily Copied 227 COMPETITIVE ACTIONS FOR DIFFERENT MARKET ENVIRONMENTS 228 Competition under Monopoly 228 Competition under Oligopoly 229 “Perfect” Competition 230 Strategy in Practice: Tacit Collusion Between AT&T and Verizon 231 Dynamic Environments 232 ìSUMMARY 232 ìKEY TERMS 233 ìREVIEW QUESTIONS 233 ìAPPLICATION EXERCISES 233 ìSTRATEGY TOOL: WHEN DOES DEFECTING FROM COLLUSION MAKE SENSE? 234 ìREFERENCES 234 Trim Size: 8.5 in X 11 in [ xviii ] fm.indd 11:8:14:PM 05/22/2015 Page xviii CONTENTS SECTION VI: MAKING AND IMPLEMENTING STRATEGY CHAPTER 12: IMPLEMENTING STRATEGY 236 HOW CITIBANK TRANSFORMED ITSELF INTO A RETAIL BANK 238 ALIGNMENT: THE 7 S MODEL 239 Strategy 240 Structure 240 Strategy in Practice: How to Use the 7 S Model 241 Systems 242 Staffing 242 Skills 242 Style 243 Ethics and Strategy: Creating an Ethical Climate and Culture Through the 7 S Model 243 Shared Values 244 STRATEGIC CHANGE 245 The Three Phases of Change 245 The Eight Steps to Successful Change 246 Strategy in Practice: Work Gloves Create Change 247 MEASUREMENT 250 Line of Sight 250 Strategy in Practice: Creating Line of Sight Measures 251 ìSUMMARY 252 ìKEY TERMS 253 ìREVIEW QUESTIONS 253 ìAPPLICATION EXERCISES 253 ìREFERENCES 254 CHAPTER 13: CORPORATE GOVERNANCE AND ETHICS ETHICS AND GOVERNANCE FAILURES AT ENRON 258 THE PURPOSES OF THE CORPORATION 259 The Shareholder Primacy Model 260 The Stakeholder Model 261 Strategy in Practice: Mapping Stakeholder Influence 262 GOVERNANCE: BOARDS AND INCENTIVES 263 The Board of Directors 264 Compensation and Incentives 265 Strategy in Practice: America’s Best and Worst Boards 265 CORPORATE ETHICS 266 Corporate Culture and Ethics 267 Creating an Ethical Climate 268 Strategy in Practice: Google, Censorship, and Google.cn 268 256 Strategy in Practice: The Johnson & Johnson Credo 269 ìSUMMARY 270 ìKEY TERMS 270 ìREVIEW QUESTIONS 271 ìAPPLICATION EXERCISES 271 ìREFERENCES 271 CHAPTER 14: STRATEGY AND SOCIETY 274 FUNDACION PARAGUAYA: FIGHTING POVERTY IN LATIN AMERICA 276 STRATEGY AND SOCIAL-VALUE ORGANIZATIONS 277 THE TOOLS OF STRATEGY AND THE CREATION OF SOCIAL VALUE 278 External Analysis and the Value Net 278 Internal Analysis: Resources and Capabilities 279 Cost Leadership, Differentiation, and Innovative Strategies 280 Corporate Strategy and Alliances 280 Strategy in Practice: Detroit Mercy Law School— Creating Unique Value for Students 280 Implementation and Governance 281 STRATEGY AND SOCIAL CHANGE 281 Corporate Social Responsibility (CSR) 281 CSR and Firm Performance 282 SOCIAL ENTREPRENEURSHIP 283 Types of Social Entrepreneurship 284 Strategy in Practice: Community Enterprise Solutions 284 Skills of Social Entrepreneurs 285 Strategy in Practice: Kinder, Lydenberg, and Domini, and the Creation of Socially Responsible Investing 285 Challenges in Social Entrepreneurship 286 ìSUMMARY 288 ìKEY TERMS 288 ìREVIEW QUESTIONS 288 ìAPPLICATION EXERCISES 289 ìREFERENCES 289 APPENDIX A: DATA SOURCES FOR ANALYSIS 292 APPENDIX B: 20 VALUABLE FINANCIAL RATIOS FOR STRATEGIC ANALYSIS 302 GLOSSARY INDEX 305 I-1 Trim Size: 8.5 in X 11 in fm.indd 11:8:14:PM 05/22/2015 CONTENTS CASEBOOK Page xix [ xix ] C-1 CASE 01: Walmart Stores: Gaining and Sustaining Competitive Advantage C-2 CASE 02: Coca-Cola and Pepsi: and the Shifting Landscape of the Carbonated Soft Drink Industry C-12 CASE 03: Intel (A): Dominance in Microprocessors C-22 CASE 04: Southwest Airlines: Flying High with Low Costs C-32 CASE 05: Harley-Davidson: Growth Challenges Ahead C-45 CASE 06: Intel (B): Responding to the Smart Phone Threat C-54 CASE 07: Nike: Sourcing and Strategy in Athletic Footwear C-62 CASE 08: AT&T and Apple: A Strategic Alliance C-70 CASE 09: Samsung: Overtaking Philips, Panasonic, and Sony as the Leader in the Consumer Electronics Industry C-82 CASE 10: New Business Models: Netflix, Redbox, Hulu, and Others in Home Movie Entertainment C-92 CASE 11: Smartphone Wars C-101 CASE 12: Lincoln Electric: Aligning for Global Growth C-112 CASE 13: Corporate Governance and Ethics: A Series of Decisions C-119 CASE 14: Safe Water Network: Mastering the Model at Dzemeni C-121 CASE 15: Walmart versus Amazon.com C-132 (recommended for Chapters 1, 3, 4, 11) CASE 16: Skype: Competing with Free C-142 (recommended for Chapters 10, 4, 11) CASE 17: Sears: In Need of a Turnaround Strategy C-152 (recommended for Chapter 13) Trim Size: 8.5 in X 11 in c01.indd 03:12:46:PM 01/27/2015 Page 2 What Is Business Strategy? 01 Trim Size: 8.5 in X 11 in c01.indd 03:12:46:PM 01/27/2015 Page 3 © MARIO ANZUONI/Reuters /Corbis LEARNING OBJECTIVES Studying this chapter should provide you with the knowledge to: 1 Define business strategy, including the importance of competitive advantage, the four choices that are critical to strategy formulation, and the strategic management process. 2 Summarize the information that the company’s mission and thorough external and internal analysis provide to guide strategy. 3 Discuss how strategies are formulated and implemented in order to achieve objectives. 4 Explain who is responsible for, and who benefits from, good business strategy. [3] 01 Trim Size: 8.5 in X 11 in I c01.indd 03:12:46:PM 01/27/2015 Page 4 Strategy at Apple n 2000, Apple computer held a loyal customer base but was limping along as a relatively minor player in the personal computer market. Launched by Steve Jobs and Steve Wozniak, Apple was one of the pioneers in the industry. Unlike other PC makers that relied on Microsoft’s operating system and application software, Apple wrote its own operating system software and much of its application software, which was known as being easy to use. In fact, Apple was the first to introduce software on a low cost personal computer with drop-down menus and a graphical user interface that allowed customers to easily complete a task—like drag a file to the trash to delete it. However, Apple’s investment in unique software led to high-priced computers and created files that were originally incompatible with those of Microsoft’s Windows operating system and Office software suite. As a result, Apple rarely achieved more than about a 5 percent share of the computer market.1 These advantages helped iPod quickly move to industry leadership, despite the fact that an iPod cost 15 to 25 percent more than a Rio.3 At the time the iPod was launched, it was difficult for most consumers to legally access digital downloads of songs. Initially, the iPod was only snapped up by a relatively small group of users, mostly teenagers and college students, who were illegally downloading songs through Napster and other free downloading sites. Apple recognized that in order to grow the market for iPods, it needed to help consumers legally access songs to play on their iPods. As a result, Apple developed software called iTunes, allowing customers to legally download songs. One main reason iTunes was able to provide legal downloads before its competitors was because Steve Jobs, as CEO of both Apple and Pixar (the animation movie production company), understood that music companies, like movie companies, were concerned about people pirating their products. So Apple worked with the music companies to sell songs that had CUSTOMERS NOW COULD EASILY AND LEGALLY ACCESS SONGS SIMPLY BY been digitized using software CONNECTING THEIR iPODS TO THEIR COMPUTERS AND LETTING THE SOFTWARE DO that prevented customers from TO THE REST. EVEN A TECHNOLOGY-CHALLENGED GRANDPARENT COULD DO IT. copying the songs to more than a few computers. iTunes was designed to be easy to use with the iPod. Customers now could That all changed in 2001, however, when Apple entered easily and legally access songs simply by connecting their an entirely new market with the launch of an MP3 portable iPods to their computers and letting the software do to the rest. music player called the iPod. Apple’s MP3 player was not Even a technology-challenged grandparent could do it.4 the first on the market. A company called Rio had offered an MP3 player for a couple of years before iPod’s entry into the But Apple wasn’t done with its music player strategy. market. But iPod quickly took market share from the Rio, for Apple’s experience in the computer business was that three primary reasons: other companies could make similar products, often at lower prices. Indeed, while Apple and IBM were the 1. iPod had a mini hard drive that allowed it to hold 500 pioneers of the personal computer industry and dominated songs, as opposed to the roughly 15 songs the Rio it during the early years, lower-priced competitors like could hold using flash memory. Dell, Hewlett-Packard, Lenovo, and ASUS, eventually 2. iPod was the first to introduce a “fly wheel” navigacame to dominate the market. Apple realized it needed to tion button—the round button that was easy to use and prevent easy imitation of its music offering. So it created allowed users to quickly scroll through menus and songs. proprietary software called Fairplay that restricted the use 3. iPod was backed with Apple’s name and an innovative of music downloaded from iTunes to iPods only. That meant design.2 [4] Trim Size: 8.5 in X 11 in c01.indd 03:12:46:PM 01/27/2015 [5] WHAT IS BUSINESS STRATEGY? consumers couldn’t buy a lower-priced MP3 player and use it with iTunes because it was incompatible. If they wanted to use a different MP3 player, they would have to download and pay for music a second time.5 To top it off, Apple did something that no other maker of computers, music players, or any other electronic device company had done. It opened its own stores to sell Apple products. This required that Apple learn how to operate retail stores. The Apple Stores helped Apple create a direct link to its customers, making it easier for consumers to learn about and try out Apple products—and get their products serviced. Page 5 As a result of Apple’s strategic initiatives, it has built a very secure market position in music players, currently holding over 70 percent of that market.6 But the battle isn’t over. Amazon has entered the industry, offering music buyers unrestricted use of its songs. Moreover, competitors e-Music, Rhapsody.com, and Spotify are offering music via subscription. Users can listen to any song they want for a monthly subscription fee. And Pandora, a free online radio service, offers similar unlimited access to songs. The $17 billion music industry is so large that it will continue to attract new competitors who want to dethrone Apple. ì How did Apple enter the music industry and within 10 years become the dominant seller of both songs and music players? Why is Pandora, a start-up, succeeding in the music industry while former giant Sony (maker of the Walkman and Discman) is struggling? For that matter, why is any company successful? Understanding the series of actions taken by Apple to achieve a dominant position in the online music business will go a long way toward understanding business strategy—a company’s plan to gain, and sustain, competitive advantage in its markets. In this chapter, we’ll help you get started by answering some basic questions. We begin with the most obvious: “What is a business strategy?” WHAT IS BUSINESS STRATEGY? The word strategy comes from the Greek word strategos, meaning, “the art of the general.” In other words, the origin of strategy comes from the art of war, and, specifically, the role of a general in a war. In fact, there is a famous treatise titled The Art of War that is said to have been authored by Sun Tzu, a legendary Chinese general. In the art of war, the goal is to win— but that is not the strategy. Can you imagine the great general Hannibal saying something like, “Our strategy is to beat Rome!” No, Hannibal’s goal was to defeat Rome. His strategy was to bring hidden strengths against the weaknesses of his enemy at the point of attack—which he did when he crossed the Alps to attack in a way that his enemies did not believe he could. He achieved an advantage through his strategy. In similar fashion, a company’s business strategy is defined as a company’s plan to gain, and sustain competitive advantage in the marketplace. This plan is based on the theory its leaders have about how to succeed in a particular market. This theory involves predictions of which markets are attractive and how a company can offer unique value to customers in those markets in a way that won’t be easily imitated by competitors. This theory then gets translated into a plan to gain competitive advantage. Apple’s theory of how to gain a competitive advantage in music download business was to create cool and easy-to-use MP3 players that could easily—and legally—download digital songs from a computer through the iTunes store. Apple sought to sustain its advantage by making it impossible for competitor MP3 players to download songs from the iTunes store. The Apple Stores contributed to Apple’s advantage by providing a direct physical link to customers that competitors couldn’t match. In this particular instance, Apple’s plan to gain, and sustain, competitive advantage worked. But there have been other times, such as with the Apple Newton Message Pad (the first handheld computer that Apple sold as a personal digital assistant) that Apple’s theory about how to gain and sustain competitive advantage did not work. Sometimes strategies are successful and sometimes they are not. Strategies are more likely to be successful when the plan explicitly takes into account four factors: 1. the attractiveness of a market 2. how to offer unique value relative to the competition business strategy A plan to achieve competitive advantage that involves making four strategic choices: (1) markets to compete in; (2) unique value the firm will offer in those markets; (3) the resources and capabilities required to offer that unique value better than competitors; and (4) ways to sustain the advantage by preventing imitation. competitive advantage When a firm generates higher profits compared to its competitors. market The industry and geographic area that a company competes in. unique value The reason a firm wins with customers or the value proposition it offers to customers, such as a low cost advantage or differentiation advantage. Trim Size: 8.5 in X 11 in [6] CH01 c01.indd 03:12:46:PM 01/27/2015 Page 6 ì WHAT IS BUSINESS STRATEGY? 3. what resources or capabilities are necessary to deliver that unique value 4. how to sustain a competitive advantage once it has been achieved. The goal of the strategic plan is to create competitive advantage. First, let’s examine the goal. Competitive Advantage What exactly do we mean when we use the term competitive advantage? 7 In the sports world, it is usually obvious when a team has a competitive advantage over another team: The better team wins the game by having a higher score. The ability to consistently win is based on attracting and developing better players and coaches, and by employing strategies to exploit the weaknesses of opponents. In the business world, the scoring is measured by looking at the profits (as a percentage of invested capital) generated by each firm. We describe the S T R AT E GY I N P R A CT I C E Measuring American Home Products’ Competitive Advantage o see which firms in an industry are most successful, we typically compare their return on assets (ROA), a calculation of operating profits divided by total assets, or their return on equity (ROE), which is operating profits divided by total stockholders’ equity. The company that consistently generates the highest returns for its investors, in terms of ROA or ROE, wins the game. For example, from 1971 to 2000, the pharmaceutical company American Home Products averaged 19 percent ROA, compared to competitor American Cyanamid’s T 7 percent. American Home Products’ ROA was higher than American Cyanamid’s every year for 30 years. This is evidence that during this time period, American Home Products had a competitive advantage over American Cyanamid.8 American Home Products’ advantage over American Cyanamid frequently has been attributed to its ability to develop more blockbuster drugs (through more effective research and development) and to quickly get those drugs to market through a larger and more effective sales force. Profitability of Different Firms in the Pharmaceutical Industry 20 18 Operating Profit (ROA %) 16 14 12 10 8 6 4 2 Source: Annual reports; 1973–1992 American Cyanamid Pfizer Upjohn Schering Plough Eli Lilly Bristol Myers Squibb Merck American Home Products 0 Trim Size: 8.5 in X 11 in c01.indd 03:12:46:PM 01/27/2015 WHAT IS BUSINESS STRATEGY? most common ways of measuring profits in Strategy in Practice: Measuring American Home Products’ Competitive Advantage. Just as in sports, where an inferior team may outscore a superior team on a given day, it may be possible for an inferior company to outscore a superior company in a particular quarter, or perhaps even a year. Competitive advantage requires that a firm consistently outperform its rivals in generating above-average profits. A firm has a competitive advantage when it can consistently generate above-average profits through a strategy that competitors are unable to imitate or find too costly to imitate. Above-average profits are profit returns in excess of what an investor expects from other investments with a similar amount of risk. Risk is an investor’s uncertainty about the profits or losses that will result from a particular investment. For example, investors suffer a lot of uncertainty (and, hence, risk) when they put their money into a start-up company that is trying to launch products based on a new technology, such as a solar power company. There is much less risk in investing in a stable firm with a long history of profitability, such as a utility company that supplies power to customers who have few, if any, alternative sources of power.9 Many organizations work to achieve objectives other than profit. For example, universities, many hospitals, government agencies, not-for-profit organizations, and social entrepreneurs play important roles in making our economy work and our society a better place to live. These organizations do not measure their success in terms of profit rates, but they still use many of the tools of strategic management to help them succeed (see Chapter 14). For these organizations, success might be measured using tangible outcomes such as the number of degrees granted, patient health and satisfaction measures, people served, or some other measure of an improved society. The primary source of a company’s competitive advantage can come from several areas of its operations. For example, the diamond company De Beers has an advantage that comes from paying lower costs for its diamonds than other companies do, because De Beers owns its own diamond mines. Competitive advantage can also come from different functional areas within the company. Biotechnology pioneer Genentech’s advantage comes primarily from research and development that has produced several blockbuster drugs; Toyota’s advantage in automobiles comes primarily from its operations (known as the Toyota Production System); Procter & Gamble’s advantage in household products comes largely from its sales and marketing, and Nordstrom’s advantage as a retailer comes largely from its merchandising and service. Page 7 [7] above-average profits Returns in excess of what an investor expects from other investments with a similar amount of risk. The Strategic Management Process The processes that firms use to develop a strategy can differ dramatically across firms. In some cases, executives do not spend significant time on strategy formulation and strategies are often based only on recent experience and limited information. However, we propose that a better approach to the formulation of strategy is the strategic management process outlined in Figure 1.1. The strategic management process for formulating and implementing strategy involves thorough external analysis and internal analysis. Only after conducting an analysis of the company’s external environment and its internal resources and capabilities are a firm’s executives and managers able to identify the most attractive business opportunities and to formulate a strategy for achieving competitive advantage. The central task of the strategy formulation process is specifying the high-level plan and set of actions the company will take in its quest to achieve competitive advantage. Once the plan for creating competitive advantage is created, the final step is to develop a detailed plan to effectively implement, or put into action, the firm’s strategy through specific activities. The focus of the strategic management process should be to make four key strategic choices, as shown in Figure 1.2 1. Which markets the company will pursue. A company’s markets include both the industries in which it competes and its geographic markets. 2. What unique value to offer the customer in those markets. This is the firm’s value proposition, the reason the company wins with a set of customers.10 3. What resources and capabilities are required? What does the company need to have and know how to do so that it can deliver its unique value better than competitors, and exactly how will the company deliver its unique value?11 strategic management process The process by which organizations formulate a plan and allocate resources to achieve competitive advantage that involves making four strategic choices: (1) markets to compete in; (2) unique value the firm will offer in those markets; (3) the resources and capabilities required to offer that unique value better than competitors; and (4) ways to sustain the advantage by preventing imitation. external analysis Examining the forces that influence industry attractiveness, including opportunities and threats that exist in the environment. internal analysis The analysis of a firm’s resources and capabilities to assess how effectively the firm is able to deliver the unique value (value proposition) that it hopes to provide to customers. Trim Size: 8.5 in X 11 in [8] CH01 c01.indd 03:12:46:PM 01/27/2015 Page 8 ì WHAT IS BUSINESS STRATEGY? [ Figure 1.1 ] The Strategic Management Process Mission External Analysis Internal Analysis                   Strategy Formulation Business Level Strategies Strategy Vehicles Corporate Strategy [Chapter 6] Dynamic Strategic Actions Cost Advantage [Chapter 4] Differentiation Advantage [Chapter 5] Vertical Integration [Chapter 7] Strategic Alliances [Chapter 8] Disruptive Business Models [Chapter 10] Competitor Interaction/ Game Theory [Chapter 11] International Strategy [Chapter 9] Strategy Implementation Strategy Implementation [Chapter 12] Governance and Ethics [Chapter 13] Social Value Organizations [Chapter 14] 4. How the company will capture value and sustain a competitive advantage over time. Firms need to create barriers to imitation to keep other companies from delivering the same value. Markets. One of the first decisions a company must make is which markets it will serve. Leaders must choose the industries a company competes in and the product and service markets within those industries. For example, before iPod, Apple only competed in the computer industry. Its product markets included desktop and laptop computers. Launching iPod and iTunes took Apple into the music industry. Later, when Apple launched the iPhone, it entered the cell phone business. It is also important to select geographic markets to serve. Apple competes on a worldwide basis, which allows it to spread heavy research and development costs across its many geographic markets. By contrast, Walmart started by focusing on rural markets, which allowed it to offer lower prices than the “mom and pop” retail stores in small towns.12 Unique Value. After a company chooses the markets in which to compete, it then attempts to offer unique value in those markets. This is often referred to as a company’s value proposition, or the value that it proposes to offer to customers. Companies typically try to achieve a competitive advantage by choosing between one of two generic strategies Trim Size: 8.5 in X 11 in c01.indd 03:12:46:PM 01/27/2015 WHAT IS BUSINESS STRATEGY? Page 9 [9] [ Figure 1.2 ] Four Key Strategic Choices in Strategic Management Markets to Pursue                Unique Value to Offer                Resources and Capabilities to Develop                    Sustaining Advantage                for offering unique value: low cost or differentiation. Companies such as Walmart, Ryanair, Taco Bell, and Kia attract customers by being cost leaders, offering products or services that are priced lower than competitor offerings. A firm that chooses a low-cost strategy (the focus of Chapter 4) focuses on reducing its costs below those of its competitors. Key sources of cost advantage include economies of scale, lower-cost inputs, or proprietary production know-how. A firm that chooses a differentiation strategy (the focus of Chapter 5) focuses on offering features, quality, convenience, or image that customers cannot get from competitors. Apple’s unique value is offering iPods (music players), iPhones (smart phones), and iPads (tablets) that are well designed, innovative, easy to use, and have features that competing products don’t have (“there’s an App for that”). In similar fashion, Starbucks wins through differentiation by offering multiple blends of high-quality coffee in convenient locations. Resources and Capabilities. Delivering unique value requires developing resources and capabilities that will allow the company to perform activities better than competitors. Indeed, perhaps the most critical role of the strategist is to figure out how to build or acquire the resources and capabilities necessary to deliver unique value. Resources refer to assets that the firm accumulates over time, such as plants, equipment, land, brands, patents, cash, and people. Steve Jobs was a key resource for Apple because he had the uncanny ability to figure out what customers wanted before even they knew. Capabilities refers to processes (or recipes) the firm develops to coordinate human activity to achieve specific goals. To illustrate, Starbucks has key resources that allow it to succeed through differentiation, include its Starbucks brand, its retail store locations, its recipes to produce different coffee blends, and even some patents to protect those recipes. Its capabilities include its processes to roast coffee beans for the best flavor, create new coffee blends, design stores with great atmosphere, and find optimal store locations. These resources and capabilities have allowed Starbucks to deliver unique value to customers, thereby helping the company outperform other coffee shops within the coffee retailing industry. Sustaining Advantage. By being the first to offer music downloads through its easy-to-use iTunes software, Apple encouraged its customers to store their entire music libraries on iTunes. Designing iTunes so that it wouldn’t download songs to other music players helped Apple to prevent competing MP3 players from taking market share from iPod. Of course, Apple’s brand image and its Apple Stores also prevent competitors from easily imitating its products and services. These actions helped Apple capture the value it created. cost advantage An advantage that a firm has over its competitors in the activities associated with producing a product or service, thereby allowing it to produce the same product at lower cost. differentiation advantage An advantage a firm has over its competitors by making a product more attractive by offering unique qualities in the form of features, reliability, and convenience that distinguishes it from competing products. Trim Size: 8.5 in X 11 in [ 10 ] CH01 c01.indd 03:12:46:PM 01/27/2015 Page 10 ì WHAT IS BUSINESS STRATEGY? WHAT INFORMATION AND ANALYSIS GUIDES STRATEGY FORMULATION? As Figure 1.1 shows, the earliest steps in the strategic management process involve analyses and choices that later result in the formulation and implementation of a company’s strategy. These choices are made within the context of the company’s mission and only after an analysis of the external environment and internal organization. Mission mission A company’s primary purpose that often specifies the business or businesses in which the firm intends to compete—or the customers it intends to serve. A company’s mission outlines the company’s primary purpose and often specifies the business or businesses in which the firm intends to compete—or the customers it intends to serve. People in business often use the terms mission, vision, or purpose somewhat interchangeably. For our purposes in this book, we will use the term mission to refer to the primary purpose of the organization. Most business firms start with a mission, even if it isn’t formally stated. For example, Starbucks founder Howard Schultz got the idea to introduce coffee bars to America when he visited Italy and experienced the great coffee and convenience of Italian espresso bars. His external analysis of the coffee shop industry in the United States led him to believe that there was an opportunity to bring an exceptional coffee experience to America. Schultz once said American coffee was so bad it tasted like “swill.” He discovered café latte when visiting an espresso bar in Verona, Italy, and thought, “I have to take this to America.”13 So he launched Starbucks, a company that offered higher-quality coffee than traditional coffee shops, and included many varieties at a premium price. In essence, Starbucks started with a mission to bring high-quality coffee to the masses in the United States. As companies grow and develop formal mission statements, these statements often define the core values that a firm espouses, and are often written to inspire employees to behave in particular ways. Starbucks formalized its mission as follows: Our mission: to nurture and inspire the human spirit—one person, one cup, and one neighborhood at a time.14 It then proceeds with the statement: Here are the principles of how we live that every day— which is followed by a set of principles or values designed to guide employee behaviors. Even after it has been formalized, however, a company’s mission is still open to interpretation, as Strategy in Practice: Apple’s Evolving Mission shows. External Analysis SWOT analysis Strategic planning method used to evaluate the strengths, weaknesses, opportunities, and threats involved in a business. External analysis is critical for addressing the first strategic choice: Where should we compete? External analysis involves: (1) an examination of the competition and the forces that shape industry competition and profitability; and (2) customer analysis to understand what customers really want. The combined results of external analysis with internal analysis of the firm are often summarized as a SWOT analysis. SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats.15 External analysis is particularly useful for shedding light on the latter two: opportunities and threats. Industry Analysis. One of the central questions for the strategist is to determine which markets or industries to compete in. The fact of the matter is that all industries are not created equal. To illustrate, between 1992 and 2006, the average return on invested capital in U.S. industries ranged from as low as zero to more than 50 percent.16 The most profitable industries include prepackaged software, soft drinks, and pharmaceuticals. These industries are more than five times as profitable as the least profitable industries, which include airlines, hotels, and steel. This does not mean that a steel or airline company cannot be successful or profitable (Southwest Airlines has been quite profitable17), but it does mean that the average profitability of all firms in these industries is low compared to other industries. This makes the challenge of making money in these low-profit industries even greater. Trim Size: 8.5 in X 11 in c01.indd 03:12:46:PM 01/27/2015 WHAT INFORMATION AND ANALYSIS GUIDES STRATEGY FORMULATION? Page 11 [ 11 ] S T R AT E GY I N P R A CT I C E Apple’s Evolving Mission hen Steve Jobs and Steve Wozniak launched Apple in 1976, their primary purpose was to make great computers that people loved to use. Twenty-four years later, Apple was still essentially a computer company when it launched the iPod, a device that took the company into the music industry. But did you know that Apple was not the first computer company to make a small, handheld MP3 player with a minihard drive that could store your entire music library? That honor goes to Compaq (later acquired by HP). Compaq developed an MP3 player before Apple, but the company decided this was not an industry and product market that it wanted to enter. Compaq decided not to pursue the MP3 business because it saw its mission as being a computer maker, and music players fell outside of that mission. Instead of refining the design and launching its MP3 player on the market, Compaq sold the technology to a Korean company. In contrast, Apple decided that this product market was not outside its mission. Apple’s decision was influenced by its external analysis. Apple looked at the multibillion-dollar music business and quickly realized that no company was offering legal digital W downloads—so the market was wide open because of the challenges of protecting the files from easily being copied. Apple’s leaders also considered its internal capabilities. Unlike Compaq—which only made computer hardware but not software—Apple had vast experience at writing software for Apple computers. It also had far greater design expertise than Compaq. In fact, the company had long been hailed for the cutting-edge designs of the iMac and some of its other computers. Apple decided to channel its internal capabilities at writing software to navigate an MP3 player. Apple’s software engineers came up with the innovative “flywheel” design for navigating the iPod. Likewise, it channeled its design capabilities toward designing a product that was elegant and small enough to fit in your pocket. As a result of formulating a strategy to enter the MP3 player market—and subsequently the iPhone and iPad markets—Apple’s mission has broadened. The company no longer focuses on just being a computer maker. In fact, in 2007 it changed its name from Apple Computer Inc. to Apple Inc. to reflect this change in its mission. Why are some industries more profitable than others? Strategy professor Michael Porter developed a model for conducting industry analysis called the Five Forces that Shape Industry Competition.18 Understanding the five forces that shape industry competition is one of the starting points for developing strategy, and will be discussed in detail in Chapter 2. This framework helps managers think about what the company can do to increase its power over suppliers and buyers, create barriers to other firms looking to enter the market, reduce the threat of substitute products or services, and reduce rivalry with competitors. Customer Analysis. External analysis also involves an analysis of customers or potential customers, notably an analysis of their needs and price sensitivity. In particular, the strategist can make better decisions about how to offer unique value by considering groups of customers who all have similar needs. This is called customer segmentation analysis.19 For example, in the automobile industry, some customers want cars that are very stylish, powerful, luxurious, and packed with technology and gadgets. These customers are the focus of companies such as Porsche, Mercedes Benz, BMW, and Lexus. Others want trucks with the capacity to haul heavy items and move easily over rough terrain. These customers are the focus of the truck divisions of Chevy and Ford. Still others want economy cars for basic transportation—the focus of Hyundai and Kia. External analysis should enlighten managers about the competitive forces that influence the profitability of particular markets and industries, as well as opportunities and threats. In addition, it should shed light on what customers want and what they are willing to pay to have their needs met. Internal Analysis Whereas external analysis focuses on a company’s industry, customers, and competitors, internal analysis focuses on the company itself. Internal analysis completes the SWOT by focusing price sensitivity The degree to which the price of a product or service affects consumers’ willingness to purchase the product or service. segmentation analysis Dividing up customers into groups or segments based on similar needs or wants. Trim Size: 8.5 in X 11 in [ 12 ] CH01 c01.indd 03:12:46:PM 01/27/2015 Page 12 ì WHAT IS BUSINESS STRATEGY? resource-based review of firm Determining the strategic resources available to a company. on strengths and weaknesses. More formally, internal analysis involves an analysis of the company’s set of resources and capabilities that can be deployed—or should be developed—to deliver unique value to customers. We discuss internal analysis in greater detail in Chapter 3. In the 1980s, the resource-based view of the firm, also known as the resource-based model, was developed to explain why some firms outperform other firms within the same industry.20 Why does Nucor make money in the steel business when most of its U.S. competitors do not? Why does Southwest fly high in the air travel business while most of its competitors are ( financially) grounded? The resource-based model assumes that each company is a collection of resources and capabilities (also referred to as competencies) that are deployed to deliver unique value.21 Firms that don’t have the resources and capabilities that are necessary to implement the strategies they are contemplating, may need to improve, change, or possibly create them in order to offer unique value to their customers. This is where resource allocation becomes an important dimension of strategy. Once a company decides how it hopes to offer unique value, it must allocate the resources necessary to build those resources or capabilities. For example, once Target realized that it could not compete directly on prices with Walmart, it allocated additional resources to move “upmarket.” This involved investing heavily in a trends department, a new mix of higher-quality products, relationships with designers, more expensive suburban retail locations, and significant TV advertising to get the message out to customers. HOW ARE STRATEGIES FORMULATED? corporate strategy Decisions about what markets to compete in, made by executives at the corporate level of an organization. business unit strategy Decisions about how to gain and sustain advantage, made at the manager level for each standalone business unit within a company. functional strategy Decisions about how to effectively implement the business unit strategy within functional areas like finance, product development, operations, information technology, sales and marketing, and customer service. strategy vehicles Activities and strategic choices—such as make versus buy, acquisitions, and strategic alliances—that influence a firm’s ability to enter particular markets, deliver unique value to customers, or create barriers to imitating its product. Formulating a strategy involves selecting which actions the company will take to gain and sustain competitive advantage. Remember, competitive advantage requires that the company do all of the following: ì Provide unique value to a set of customers in the appropriate markets. ì Develop a set of resources and capabilities that allow the company to deliver that unique value to customers better than competitors. ì Sustain the competitive advantage by figuring out how to prevent imitation of the chosen strategy. A company will also need to formulate, and then implement, strategy at three different levels of the organization: corporate, business unit (product), and functional. Corporate strategy refers to decisions that are made by senior corporate executives about where to compete in terms of industries and markets. For example, Amazon’s corporate executives made the decision to enter the electronic reader/tablet business with the Kindle where it would face new competitors like Apple. Similarly, Amazon’s launch of Amazon Web Services—a business that provides web hosting, cloud storage, and marketplace software—was made at corporate headquarters by the corporate management team. Business unit strategy is made at the level of the strategic business unit—standalone business units in a company that typically have their own profit and loss responsibility. Amazon’s online discount business would be considered one business unit, whereas Kindle and Amazon Web Services would be different business units. The general manager of each business unit addresses the questions we’ve identified regarding how to gain and sustain advantage in that particular market. Finally, within each business unit are different functions such as finance, product development, operations, information technology, sales and marketing, and customer service. A functional strategy should align with the overall business unit strategies to effectively implement the business unit strategy (see Figure 1.3). Strategy Vehicles for Achieving Strategic Objectives In many instances, firms rely on a few key strategy vehicles to help them enter attractive markets and build the resources and capabilities necessary to deliver unique value. These strategy vehicles include such things as diversification, acquisitions, alliances, vertical Trim Size: 8.5 in X 11 in c01.indd 03:12:46:PM 01/27/2015 HOW ARE STRATEGIES FORMULATED? Page 13 [ 13 ] [ Figure 1.3 ] Multiple Levels of Strategic Analysis Multiple Levels of Strategic Analysis Corporate Strategy (Where to compete) Business Unit 1 Strategy (How to compete) R&D Strategy (How to implement) Business Unit 2 Strategy (How to compete) Operations Strategy (How to implement) Marketing Strategy (How to implement) Identifies where to compete in terms of industries and markets. Identifies what unique value to offer (cost or differentiation) and how to deliver it Provides guidance for managing and allocating resources to distinct business units Provides a plan to achieve competitive advantage H.R. Strategy (How to implement) Strategies and tactics of the functional areas should align with and implement the overall business unit strategy. integration, and international expansion. In some cases, a firm may choose to grow by diversifying, adding to its products or opening a new line of business. Acquisition is a strategy vehicle used for growth and diversification or to acquire key resources. For example, when Apple acquired NeXT Computing, the late Steve Jobs’s start-up, Apple acquired the operating system that became OSX—and the acquisition brought Steve Jobs back to Apple.22 More recently, Apple acquired SIRI, a company that made voice recognition and search software that was the technology behind SIRI (pronounced sir’-ee), Apple’s personal assistant on the iPhone. Sometimes companies decide to access new resources and capabilities through a strategic alliance—an exclusive relationship with another firm—rather than through acquisition. For example, Apple teamed up with AT&T in an alliance to launch the iPhone in the United States. AT&T put huge promotional dollars behind the iPhone—and paid Apple 10 percent of their revenues from each iPhone subscriber—in order to be the exclusive distributor of iPhones for the first five years. Vertical integration, or the make-buy decision, is also a vehicle for achieving objectives.23 For example, when Apple decided to move into retailing by establishing Apple Stores, the company made a decision to “make” stores that sold their own products, rather than simply “buy” the retailing services of stores run by other companies, like Best Buy or Walmart. Finally, companies may use international expansion as a vehicle to achieve economies of scale, access key resources, or learn new skills. Indeed, some companies use international expansion as a primary source of competitive advantage. These strategy vehicles—discussed in detail in Chapters 6 to 9—are important tools that strategists use to achieve key strategic objectives. Strategy Implementation The final step in the strategic management process is to implement the strategy that was chosen during the strategy formulation phase. Strategy implementation occurs when a company adopts a set of organizational processes that enable it to effectively carry out its strategy. Effective implementation typically requires the following: 1. The functional strategies within the company—research and development, operations, sales and marketing, human resource management—are well aligned with delivering the unique value identified in the overall strategy. Implementation is generally more successful when a company can measure how effectively functional activities are being performed to support the overall strategy. strategy implementation The translation of a chosen strategy into organizational action so as to effectively implement the activities required to achieve strategic goals and objectives. Trim Size: 8.5 in X 11 in [ 14 ] CH01 c01.indd 03:12:46:PM 01/27/2015 Page 14 ì WHAT IS BUSINESS STRATEGY? S T R AT E GY I N P R A CT I C E Walmart Functional Strategies Implement the Overall Strategy W hen a company has a clear strategy regarding how it plans to offer unique value, or “win” with customers, this helps guide the implementation of the overall strategy within each of the different business functions. As we’ve discussed, Walmart’s strategy is to win by being a cost leader in its markets. Walmart’s functional areas support that strategy in a number of ways:24 ì Walmart’s human resource management strategy focuses on keeping labor costs as low as possible. Walmart pays relatively low wages and has few layers of management, which minimizes labor costs. Walmart also has a nonunion stance and once even closed a store in Canada when the workers tried to unionize.25 Managers have small offices with inexpensive furniture, and when they travel, they stay at inexpensive hotels and frequently share a room. ì Walmart’s information technology and operations areas also focus attention on cost reduction. Walmart has invested in information technology to lower the costs of communicating with thousands of suppliers and to provide suppliers with real-time data on what products are selling, at what price, in what store. ì Walmart purchasing department negotiates aggressively with suppliers. Walmart uses its tremendous buying power to get the lowest prices on products from its suppliers. It also offers a product mix that appeals to price-sensitive customers. ì Marketing does price checks at competitors. The goal of the marketing staff is to ensure that Walmart’s prices are always as low, if not lower, than competitors. 2. The organization’s structure, systems, staff, skills, style (culture), and shared values are designed to facilitate the execution of the strategy. This is the McKinsey 7-S framework, which is useful for creating the alignment necessary to ensure effective implementation. We discuss how companies can effectively create alignment with their strategy—or change the organization to align with a new strategy—in Chapter 12. The Strategy in Practice: Walmart Functional Strategies Implement the Overall Strategy feature describes some of the actions that Walmart has taken to ensure that its functional activities align with and implement the overall business unit strategy. To ensure successful implementation, the organization should have clear metrics, or ways to measure whether or not the plan is being implemented. In Chapter 12, we provide a strategy tool, our version of the balanced scorecard, which suggests some useful metrics that functional area leaders, and the CEO and top management team, can use to determine how effectively strategies are being implemented.26 WHO IS RESPONSIBLE FOR BUSINESS STRATEGY? strategic leaders Organizational leaders charged with formulating and implementing a strategy with the objective of ensuring the survival and success of an organization. deliberate strategy A plan or pattern of action that is formulated through a deliberate planning process that is then carried out to achieve the mission or goals of an organization. Strategic leaders are typically the leaders of an organization who develop strategy through the strategic management process. These leaders are responsible for not only formulating strategy, but also for explaining the strategy in a way that employees will understand—and in a way that will motivate employees to execute it. Chapter 13 explains the role the board of directors and the top management team play in formulating and implementing strategy. Theorist Henry Mintzberg refers to strategies that are developed by management, using the strategic management process shown in Figure 1.1, as “intended” or “deliberate” strategies.27 Deliberate strategies are implemented as a result of careful analysis of markets, customers, competitors, and a firm’s resources and capabilities. Target’s move to upscale discount retailing came after it concluded that it could not compete with Walmart on costs and prices. So Trim Size: 8.5 in X 11 in c01.indd 03:12:46:PM 01/27/2015 WHO IS RESPONSIBLE FOR BUSINESS STRATEGY? ETHICS Page 15 [ 15 ] A N D ST R AT E GY The Price Companies Pay to Stay Competitive ne of the central ethical challenges facing the strategist is making decisions designed to deliver unique value to customers. A decision could, for example, focus on low cost and how it might result in reduced value for specific stakeholder groups. Over the past few years, an increasing number of US companies have shut down US facilities and fired American workers as they have shifted their activities overseas to save money. For example, IBM laid off over 1,200 employees in New York and Vermont because their jobs could be done more cost effectively in “Brazil, India, and now China.”31 In similar fashion, HP announced layoffs of 500 customer service workers in Arkansas due to global restructuring, the term often used to describe a company’s plan to fire workers and move activities from one location to another.32 And Eaton, a 101-year-old Cleveland-based manufacturer of electronic components, moved its corporate address to Ireland, where the top corporate tax rate is 12.5 percent versus 35 percent in the United States. These are only a few of the many examples of organizations making difficult decisions in order to stay competitive. But at what price? O In each of these instances, the company’s leaders are responding to customer demands (lower…

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