Strategic Management rot6128x_fm_i-xxviii_1.indd 1 11/26/19 7:34 PM FINAL PAGES rot6128x_fm_i-xxviii_1.indd 2 ..._ aptara 11/26/19 7:34 PM I EQA FIFTH EDITION Strategic Management Frank T. Rothaermel Georgia Institute of Technology rot6128x_fm_i-xxviii_1.indd 3 11/26/19 7:34 PM STRATEGIC MANAGEMENT, FIFTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright ©2021 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions ©2019, 2017, and 2015. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LWI 24 23 22 21 20 ISBN 978-1-260-26128-8 (bound edition) MHID 1-260-26128-X (bound edition) ISBN 978-1-264-10379-9 (loose-leaf edition) MHID 1-264-10379-4 (loose-leaf edition) ISBN 978-1-264-10370-6 (instructor’s edition) MHID 1-264-10370-0 (instructor’s edition) Portfolio Director: Michael Ablassmeir Product Developers: Anne Ehrenworth, Lai Moy Executive Marketing Manager: Debbie Clare Content Project Managers: Mary E. Powers (core), Keri Johnson (assessment) Buyer: Susan K. Culbertson Design: Matt Diamond Content Licensing Specialist: Brianna Kirschbaum Cover Image: (Earth): skegbydave/Getty Images; (Spheres): Ilin Sergey/Shutterstock Compositor: Aptara®, Inc. All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Names: Rothaermel, Frank T., author. Title: Strategic management / Frank T. Rothaermel. Description: Fifth edition. | New York, NY : McGraw-Hill Education, 2021. | Includes bibliographical references and index. Identifiers: LCCN 2019046436 (print) | LCCN 2019046437 (ebook) | ISBN 9781264103799 (spiral bound) | ISBN 9781260261288 (hardback) | ISBN 9781264103782 (ebook) | ISBN 9781264103713 (ebook other) Subjects: LCSH: Strategic planning. | Management. Classification: LCC HD30.28 .R6646 2021 (print) | LCC HD30.28 (ebook) | DDC 658.4/012—dc23 LC record available at https://lccn.loc.gov/2019046436 LC ebook record available at https://lccn.loc.gov/2019046437 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered rot6128x_fm_i-xxviii_1.indd 4 11/26/19 7:34 PM DEDICATION To my eternal family for their love, support, and sacrifice: Kelleyn, Harris, Winston, Roman, Adelaide, Avery, and Ivy. —Frank T. Rothaermel rot6128x_fm_i-xxviii_1.indd 5 11/26/19 7:34 PM CONTENTS IN BRIEF PART ONE / PART TWO / PART THREE / PART FOUR / ANALYSIS 2 CHAPTER 1 What Is Strategy? 4 CHAPTER 2 Strategic Leadership: Managing the Strategy Process 32 CHAPTER 3 External Analysis: Industry Structure, Competitive Forces, and Strategic Groups 72 CHAPTER 4 Internal Analysis: Resources, Capabilities, and Core Competencies 116 CHAPTER 5 Competitive Advantage, Firm Performance, and Business Models 154 FORMULATION 190 CHAPTER 6 Business Strategy: Differentiation, Cost Leadership, and Blue Oceans 192 CHAPTER 7 Business Strategy: Innovation, Entrepreneurship, and Platforms 230 CHAPTER 8 Corporate Strategy: Vertical Integration and Diversification 276 CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions 320 CHAPTER 10 Global Strategy: Competing Around the World 350 IMPLEMENTATION 388 CHAPTER 11 Organizational Design: Structure, Culture, and Control 390 CHAPTER 12 Corporate Governance and Business Ethics 432 MINICASES 459 HOW TO CONDUCT A CASE ANALYSIS 460 PART FIVE / FULL-LENGTH CASES Twelve full-length cases are included in Connect. A total of 22 full-length cases are available through McGraw-Hill Create: www.mcgrawhillcreate.com/rothaermel vi rot6128x_fm_i-xxviii_1.indd 6 12/4/19 9:24 AM MINICASES & FULL-LENGTH CASES MINICASES / 1 2 3 4 5 6 7 8 9 10 11 12 Apple: What’s Next? 471 Starbucks CEO Kevin Johnson: “I’m not Howard Schultz” BlackBerry’s Rise and Fall 475 480 Nike’s Core Competency: The Risky Business of Creating Heroes 482 Business Model Innovation: How Dollar Shave Club Disrupted Gillette How JCPenney Sailed into a Red Ocean 489 Platform Strategy: How PayPal Solved the Chicken-or-Egg Problem GE: Corporate Strategy Gone Wrong 492 495 Disney: Building Billion-Dollar Franchises Hollywood Goes Global 487 499 503 Yahoo: From Internet Darling to Fire Sale 508 Uber: Ethically Most Challenged Tech Company? 511 FULL-LENGTH CASES / The twelve cases included in Connect are noted below. All cases are available through McGraw-Hill Create: www.mcgrawhillcreate.com/rothaermel 1 2 3 4 5 6 7 8 9 10 11 Airbnb, Inc. * ® Kickstarter >> + Facebook, Inc. >> ® SpaceX >> + Delta Air Lines, Inc. The Movie Exhibition Industry >> + Starbucks Corporation ® The Vanguard Group * ® Better World Books and the Triple Bottom Line McDonald’s Corporation >> Best Buy Co., Inc. >> ® ® 12 13 14 15 16 17 18 19 20 21 22 Walmart, Inc. Tesla, Inc. >> Netflix, Inc. ® ® Amazon.com, Inc. >> Apple, Inc. >> ® ® The Walt Disney Company >> ® UPS in India Alphabet’s Google Merck & Co., Inc. Nike, Inc. * ® Uber Technologies * NEW TO FIFTH EDITION, >> REVISED AND UPDATED FOR THE FIFTH EDITION, + THIRD-PARTY CASE vii rot6128x_fm_i-xxviii_1.indd 7 12/6/19 12:17 PM CHAPTERCASES & STRATEGY HIGHLIGHTS CHAPTERCASES / STRATEGYHIGHLIGHTS / 1 2 3 4 1.1 1.2 2.1 5 6 7 8 9 10 11 12 Tesla’s Secret Strategy 5 Leadership Crisis at Facebook? 33 Airbnb: Disrupting the Hotel Industry 73 Five Guys’ Core Competency: “Make the Best Burger, Don’t Worry about Cost” 117 The Quest for Competitive Advantage: Apple vs. Microsoft 155 JetBlue Airways: En Route to a New Blue Ocean? 193 Netflix: Disrupting the TV Industry 231 Amazon’s Corporate Strategy 277 Little Lyft Gets Big Alliance Partners and Beats Uber in Going Public 321 IKEA: The World’s Most Profitable Retailer 351 “A” Is for Alphabet and “G” Is for Google 391 Theranos: Bad Blood 433 2.2 3.1 3.2 4.1 4.2 5.1 5.2 6.1 6.2 7.1 7.2 8.1 8.2 9.1 9.2 10.1 10.2 11.1 11.2 12.1 12.2 Does Twitter Have a Strategy? 9 Merck’s Stakeholder Strategy 20 Teach for America: How Wendy Kopp Inspires Future Leaders 41 Starbucks CEO: “It’s Not What We Do” 54 Blockbuster’s Bust 79 From League of Legends to Fortnite: The Rise of e-Sports 103 Dr. Dre’s Core Competency: Coolness Factor 122 Applying VRIO: The Rise and Fall of Groupon 133 PepsiCo’s Indra Nooyi: Performance with Purpose 175 Threadless: Leveraging Crowdsourcing to Design Cool T-Shirts 178 Dr. Shetty: “The Henry Ford of Heart Surgery” 210 Cirque du Soleil: Finding a New Blue Ocean? 219 Standards Battle: Which Automotive Technology Will Win? 244 Wikipedia: Disrupting the Encyclopedia Business 261 The Equity Alliance between Coca-Cola and Monster: A Troubled Engagement? 288 P&G’s Diversification Strategy: Turning the Tide? 306 How Tesla Used Alliances Strategically 327 Kraft Heinz: From Hostile Takeovers as Specialty to Eating Humble Pie 338 Does GM’s Future Lie in China? 360 Walmart Retreats from Germany, and Lidl Invades the United States 363 Zappos: Of Happiness and Holacracy 407 Sony vs. Apple: Whatever Happened to Sony? 414 HP’s Boardroom Drama and Divorce 444 VW’s Dieselgate: School of Hard NOx 449 viii rot6128x_fm_i-xxviii_1.indd 8 11/26/19 7:34 PM CONTENTS PART ONE / ANALYSIS 2 CHAPTER 1 WHAT IS STRATEGY? 4 / CHAPTERCASE 1 Part I Tesla’s Secret Strategy 5 2.4 Strategic Decision Making 57 Two Distinct Modes of Decision Making 58 Cognitive Biases and Decision Making 58 How to Improve Strategic Decision Making 62 2.5 Implications for Strategic Leaders 63 CHAPTERCASE 2 / Part II 64 CHAPTER 3 1.1 What Strategy Is: Gaining and Sustaining Competitive Advantage 6 Crafting a Good Strategy at Tesla 7 What Is Competitive Advantage? 10 1.2 Stakeholder Strategy and Competitive Advantage 13 Value Creation 13 Stakeholder Strategy 14 Stakeholder Impact Analysis 15 1.3 The Analysis, Formulation, Implementation (AFI) Strategy Framework 21 Key Topics and Questions of the AFI Strategy Framework 22 1.4 Implications for Strategic Leaders 23 CHAPTERCASE 1 / Part II 24 CHAPTER 2 STRATEGIC LEADERSHIP: MANAGING THE STRATEGY PROCESS 32 / CHAPTERCASE 2 Part I Leadership Crisis at Facebook? 33 2.1 Strategic Leadership 34 What Do Strategic Leaders Do? 35 How Do You Become a Strategic Leader? 35 The Strategy Process across Levels: Corporate, Business, and Functional Managers 37 2.2 Vision, Mission, and Values 40 Vision 40 Mission 45 Values 46 2.3 The Strategic Management Process 47 Top-Down Strategic Planning 47 Scenario Planning 48 Strategy as Planned Emergence: Top-Down and Bottom-Up 51 EXTERNAL ANALYSIS: INDUSTRY STRUCTURE, COMPETITIVE FORCES, AND STRATEGIC GROUPS 72 / CHAPTERCASE 3 Part I Airbnb: Disrupting the Hotel Industry 73 3.1 The PESTEL Framework 74 Political Factors 75 Economic Factors 76 Sociocultural Factors 78 Technological Factors 78 Ecological Factors 80 Legal Factors 80 3.2 Industry Structure and Firm Strategy: The Five Forces Model 81 Industry vs. Firm Effects in Determining Firm Performance 81 Competition in the Five Forces Model 82 The Threat of Entry 84 The Power of Suppliers 87 The Power of Buyers 88 The Threat of Substitutes 89 Rivalry among Existing Competitors 90 Applying the Five Forces Model to the U.S. Airline Industry 96 A Sixth Force: The Strategic Role of Complements 98 3.3 Changes over Time: Entry Choices and Industry Dynamics 99 Entry Choices 99 Industry Dynamics 102 3.4 Performance Differences within the Same Industry: Strategic Groups 105 The Strategic Group Model 106 Mobility Barriers 107 3.5 Implications for Strategic Leaders 108 CHAPTERCASE 3 / Part II 109 ix rot6128x_fm_i-xxviii_1.indd 9 12/5/19 11:02 AM x CONTENTS CHAPTER 4 INTERNAL ANALYSIS: RESOURCES, CAPABILITIES, AND CORE COMPETENCIES 116 / CHAPTERCASE 4 Part I Five Guys’ Core Competency: “Make the Best Burger, Don’t Worry about Cost” 117 5.2 Business Models: Putting Strategy into Action 177 The Why, What, Who, and How of Business Models Framework 177 Popular Business Models 180 Dynamic Nature of Business Models 182 5.3 Implications for Strategic Leaders 183 CHAPTERCASE 5 / Part II 184 4.1 From External to Internal Analysis 119 4.2 Core Competencies 120 Resources and Capabilities 124 4.3 The Resource-Based View 126 Resource Heterogeneity and Resource Immobility 127 The VRIO Framework 128 Isolating Mechanisms: How to Sustain a Competitive Advantage 132 4.4 The Dynamic Capabilities Perspective 137 Core Rigidities 137 Dynamic Capabilities 138 Resource Stocks and Resource Flows 139 4.5 The Value Chain and Strategic Activity Systems 140 The Value Chain 140 Strategic Activity Systems 143 4.6 Implications for Strategic Leaders 146 Using SWOT Analysis to Generate Insights from External and Internal Analysis 146 CHAPTERCASE 4 / Part II 148 CHAPTER 5 COMPETITIVE ADVANTAGE, FIRM PERFORMANCE, AND BUSINESS MODELS 154 / CHAPTERCASE 5 Part I The Quest for Competitive Advantage: Apple vs. Microsoft 155 5.1 Competitive Advantage and Firm Performance 156 Accounting Profitability 156 Shareholder Value Creation 163 Economic Value Creation 165 The Balanced Scorecard 171 The Triple Bottom Line 174 rot6128x_fm_i-xxviii_1.indd 10 PART TWO / FORMULATION 190 CHAPTER 6 BUSINESS STRATEGY: DIFFERENTIATION, COST LEADERSHIP, AND BLUE OCEANS 192 / CHAPTERCASE 6 Part I JetBlue Airways: En Route to a New Blue Ocean? 193 6.1 Business-Level Strategy: How to Compete for Advantage 195 Strategic Position 196 Generic Business Strategies 196 6.2 Differentiation Strategy: Understanding Value Drivers 198 Product Features 201 Customer Service 201 Complements 201 6.3 Cost-Leadership Strategy: Understanding Cost Drivers 202 Cost of Input Factors 204 Economies of Scale 204 Learning Curve 207 Experience Curve 211 6.4 Business-Level Strategy and the Five Forces: Benefits and Risks 212 Differentiation Strategy: Benefits and Risks 212 Cost-Leadership Strategy: Benefits and Risks 214 6.5 Blue Ocean Strategy: Combining Differentiation and Cost Leadership 215 Value Innovation 216 Blue Ocean Strategy Gone Bad: “Stuck in the Middle” 218 6.6 Implications for Strategic Leaders 222 CHAPTERCASE 6 / Part II 222 12/5/19 11:02 AM CONTENTS CHAPTER 7 BUSINESS STRATEGY: INNOVATION, ENTREPRENEURSHIP, AND PLATFORMS 230 / 8.4 Corporate Diversification: Expanding Beyond a Single Market 299 Types of Corporate Diversification 301 Leveraging Core Competencies for Corporate Diversification 303 Corporate Diversification and Firm Performance 308 CHAPTERCASE 7 Part I Netflix: Disrupting the TV Industry 231 8.5 Implications for Strategic Leaders 311 7.1 Competition Driven by Innovation 232 CHAPTERCASE 8 / Part II 312 Netflix’s Continued Innovation 233 The Speed of Innovation 233 The Innovation Process 234 7.2 Strategic and Social Entrepreneurship 237 7.3 Innovation and the Industry Life Cycle 240 Introduction Stage 241 Growth Stage 243 Shakeout Stage 247 Maturity Stage 247 Decline Stage 248 Crossing the Chasm 249 7.4 Types of Innovation 255 Incremental vs. Radical Innovation 256 Architectural vs. Disruptive Innovation 258 7.5 Platform Strategy 263 The Platform vs. Pipeline Business Models 263 The Platform Ecosystem 264 7.6 Implications for Strategic Leaders 268 CHAPTERCASE 7 / Part II 269 xi CHAPTER 9 CORPORATE STRATEGY: STRATEGIC ALLIANCES, MERGERS AND ACQUISITIONS 320 / CHAPTERCASE 9 Part I Little Lyft Gets Big Alliance Partners and Beats Uber in Going Public 321 9.1 How Firms Achieve Growth 323 The Build-Borrow-or-Buy Framework 323 9.2 Strategic Alliances 326 Why Do Firms Enter Strategic Alliances? 326 Governing Strategic Alliances 330 Alliance Management Capability 332 9.3 Mergers and Acquisitions 335 Why Do Firms Merge with Competitors? 335 Why Do Firms Acquire Other Firms? 337 M&A and Competitive Advantage 340 9.4 Implications for Strategic Leaders 341 CHAPTER 8 CHAPTERCASE 9 / Part II 342 CORPORATE STRATEGY: VERTICAL INTEGRATION AND DIVERSIFICATION 276 CHAPTER 10 / CHAPTERCASE 8 Part I Amazon’s Corporate Strategy 277 8.1 What Is Corporate Strategy? 280 Why Firms Need to Grow 280 Three Dimensions of Corporate Strategy 281 8.2 The Boundaries of the Firm 283 Firms vs. Markets: Make or Buy? 284 Alternatives on the Make-or-Buy Continuum 287 8.3 Vertical Integration along the Industry Value Chain 291 Types of Vertical Integration 292 Benefits and Risks of Vertical Integration 294 When Does Vertical Integration Make Sense? 297 Alternatives to Vertical Integration 297 rot6128x_fm_i-xxviii_1.indd 11 GLOBAL STRATEGY: COMPETING AROUND THE WORLD 350 / CHAPTERCASE 10 Part I IKEA: The World’s Most Profitable Retailer 351 10.1 What Is Globalization? 353 Stages of Globalization 355 State of Globalization 357 10.2 Going Global: Why? 358 Advantages of Going Global 358 Disadvantages of Going Global 362 10.3 Going Global: Where and How? 365 Where in the World to Compete? The CAGE Distance Framework 365 How Do MNEs Enter Foreign Markets? 369 12/5/19 11:02 AM xii CONTENTS 10.4 Cost Reductions vs. Local Responsiveness: The Integration-Responsiveness Framework 370 International Strategy 371 Multidomestic Strategy 372 Global-Standardization Strategy 372 Transnational Strategy 373 10.5 National Competitive Advantage: World Leadership in Specific Industries 375 Porter’s Diamond Framework 376 10.6 Implications for Strategic Leaders 379 CHAPTERCASE 10 / Part II 380 PART THREE / CHAPTER 12 CORPORATE GOVERNANCE AND BUSINESS ETHICS 432 / CHAPTERCASE 12 Part I Theranos: Bad Blood 433 12.1 The Shared Value Creation Framework 435 Public Stock Companies and Shareholder Capitalism 435 Creating Shared Value 437 12.2 Corporate Governance 438 Agency Theory 440 The Board of Directors 441 Other Governance Mechanisms 443 IMPLEMENTATION 388 12.3 Strategy and Business Ethics 448 Bad Apples vs. Bad Barrels 450 CHAPTER 11 12.4 Implications for Strategic Leaders 451 ORGANIZATIONAL DESIGN: STRUCTURE, CULTURE, AND CONTROL 390 CHAPTERCASE 12 / Part II 452 / CHAPTERCASE 11 Part I “A” Is for Alphabet and “G” Is for Google 391 11.1 Organizational Design and Competitive Advantage 393 Organizational Inertia: The Failure of Established Firms 395 Organizational Structure 397 Mechanistic vs. Organic Organizations 398 11.2 Strategy and Structure 400 Simple Structure 401 Functional Structure 401 Multidivisional Structure 404 Matrix Structure 408 11.3 Organizing for Innovation 412 11.4 Organizational Culture: Values, Norms, and Artifacts 416 PART FOUR / MINICASES 459 HOW TO CONDUCT A CASE ANALYSIS 460 PART FIVE / FULL-LENGTH CASES Twelve full-length cases are included in Connect. A total of 22 full-length cases are available through McGraw-Hill Create: www.mcgrawhillcreate.com/ rothaermel Company Index 517 Name Index 523 Subject Index 531 Where Do Organizational Cultures Come From? 419 How Does Organizational Culture Change? 419 Organizational Culture and Competitive Advantage 420 11.5 Strategic Control-and-Reward Systems 422 Input Controls 423 Output Controls 423 11.6 Implications for Strategic Leaders 424 CHAPTERCASE 11 / Part II 425 rot6128x_fm_i-xxviii_1.indd 12 12/5/19 11:02 AM ABOUT THE AUTHOR Frank T. Rothaermel Georgia Institute of Technology Frank T. Rothaermel, PhD, a Professor of Strategy & Innovation, holds the Russell and Nancy McDonough Chair in the Scheller College of Business at the Georgia Institute of Technology (GT) and is an Alfred P. Sloan Industry Studies Fellow. He received a National Science Foundation (NSF) CAREER award, which “offers the National Science Foundation’s most prestigious awards in support of … those teacher-scholars who most effectively integrate research and education” (NSF CAREER Award description). Frank’s research interests lie in the areas of strategy, innovation, and entrepreneurship. Frank has published over 35 articles in leading academic journals such as the Strategic Management Journal, Organization Science, Academy of Management Journal, Academy of Management Review, and elsewhere. Based on having published papers in the top 1 percent based on citations, Thomson Reuters identified Frank as one of the “world’s most influential scientific minds.” He is listed among the top-100 scholars based on impact over more than a decade in both economics and business. Bloomberg Businessweek named Frank one of Georgia Tech’s Prominent Faculty in its national survey of business schools. The Kauffman Foundation views Frank as one of the world’s 75 thought leaders in entrepreneurship and innovation. Frank has received several recognitions for his research, including the ©Kelleyn Rothaermel Sloan Industry Studies Best Paper Award, the Academy of Management Newman Award, the Strategic Management Society Conference Best Paper Prize, the DRUID Conference Best Paper Award, the Israel Strategy Conference Best Paper Prize, and he is the inaugural recipient of the Byars Faculty Excellence Award. Frank currently serves or has served on the editorial boards of the Strategic Management Journal, Organization Science, Academy of Management Journal, Academy of Management Review, and Strategic Organization. Frank regularly translates his research findings for wider audiences in articles in the MIT Sloan Management Review, The Wall Street Journal, Forbes, and elsewhere. To inform his research Frank has conducted extensive fieldwork and executive training with leading corporations such as Amgen, Daimler, Eli Lilly, Equifax, GE Energy, GE Healthcare, Hyundai Heavy Industries (South Korea), Kimberly-Clark, Microsoft, McKesson, NCR, Turner (TBS), UPS, among others. Frank has a wide range of executive education experience, including teaching in programs at GE Management Development Institute (Crotonville, New York), Georgia Institute of Technology, Georgetown University, ICN Business School (France), Politecnico di Milano (Italy), St. Gallen University (Switzerland), and the University of Washington. He received numerous teaching awards for excellence in the classroom including the GT-wide Georgia Power Professor of Excellence award. When launched in 2012, Frank’s Strategic Management text received the McGraw-Hill 1st Edition of the Year Award in Business & Economics. In 2018, the 4th edition of the text received McGraw-Hill’s Product of the Year Award in Business & Economics. Frank’s Strategic Management text has been translated into Greek, Korean, Mandarin, and Spanish. Sixteen of his case studies are Most Popular among the cases distributed by Harvard Business Publishing. Frank held visiting professorships at EBS University of Business and Law (Germany), Singapore Management University (Tommie Goh Professorship), and the University of St. Gallen (Switzerland). He is a member of the American Economic Association, Academy of Management, and the Strategic Management Society. Frank holds a PhD degree in strategic management from the University of Washington; an MBA from the Marriott School of Management at Brigham Young University; and is Diplom-Volkswirt (M.Sc. equivalent) in economics from the University of Duisburg-Essen, Germany. Frank completed training in the case teaching method at the Harvard Business School. xiii rot6128x_fm_i-xxviii_1.indd 13 12/3/19 11:39 AM PREFACE The market for strategy texts can be broadly separated into two overarching categories: traditional application-based and research-based. Traditional application-based strategy books represent the first-generation texts with first editions published in the 1980s. The researchbased strategy books represent the second-generation texts with first editions published in the 1990s. I wrote this text to address a needed new category—a third generation of strategy content that combines into one the student-accessible, application-oriented frameworks of the first-generation texts with the research-based frameworks of the second-generation texts. The market response to this unique approach to teaching and studying strategy continues to be overwhelmingly enthusiastic. To facilitate an enjoyable and refreshing reading experience that enhances student learning and retention, I synthesize and integrate strategy frameworks, empirical research, and practical applications with current real-world examples. This approach and emphasis on real-world examples offers students a learning experience that uniquely combines rigor and relevance. As John Media of the University of Washington’s School of Medicine and lifelong researcher on how the mind organizes information explains: How does one communicate meaning in such a fashion that learning is improved? A simple trick involves the liberal use of relevant real-world examples, thus peppering main learning points with meaningful experiences. . . . Numerous studies show this works. . . . The greater the number of examples . . . the more likely the students were to remember the information. It’s best to use real-world situations familiar to the learner. . . . Examples work because they take advantage of the brain’s natural predilection for pattern matching. Information is more readily processed if it can be immediately associated with information already present in the brain. We compare the two inputs, looking for similarities and differences as we encode the new information. Providing examples is the cognitive equivalent of adding more handles to the door. [The more handles one creates at the moment of learning, the more likely the information can be accessed at a later date.] Providing examples makes the information more elaborative, more complex, better encoded, and therefore better learned.* Strategic Management brings conceptual frameworks to life via examples that cover products and services from companies with which students are familiar, such as Facebook, Amazon, Google, Tesla, Starbucks, Apple, McDonald’s, Nike, Disney, Airbnb, and Uber. Liberal use of such examples aids in making strategy relevant to students’ lives and helps them internalize strategy concepts and frameworks. Integrating current examples with modern strategy thinking, I prepare students with the foundation they need to understand how companies gain and sustain competitive advantage. I also develop students’ skills to become successful leaders capable of making well-reasoned strategic decisions in a turbulent 21st century. I’m pleased to introduce the new 5th edition of Strategic Management. My distinctive approach to teaching strategy not only offers students a unique learning experience that combines theory and practice, but also provides tight linkages between concepts and cases. In this new 5th edition, I build upon the unique strengths of this product, and continue to add improvements based upon hundreds of insightful reviews and important feedback from professors, students, and working professionals. The hallmark features of this text continue to be: ■ ■ Student engagement via practical and relevant application of strategy concepts using a holistic Analysis, Formulation, and Implementation (AFI) Strategy Framework. Synthesis and integration of empirical research and practical applications combined with relevant strategy material to focus on “What is important?” for the student and “Why is it important?” *Medina, J. (2014), Brain Rules: 12 Principles for Surviving and Thriving at Work, Home, and School. (Seattle: Pear Press), 139–140. xiv rot6128x_fm_i-xxviii_1.indd 14 11/26/19 7:34 PM PREFACE ■ ■ ■ ■ ■ ■ ■ xv Strong emphasis on diversity and inclusion by featuring a wipe range of strategic leapers from pifferent bac-grounps anp fielps, not just in business, but also in entertainment, professional sports, anp so forth. Coverage of a wide array of organizations, incluping for-profit public (Fortune 100) companies, private firms (incluping startups), as well as nonprofit organizations. All of them neep a goop strategy! Global perspective, with a focus on competing arounp the worlp, featuring many leaping companies from Asia, Europe, anp Latin America, as well as North America. I was fortunate to stupy, live, anp wor- across the globe, anp I attempt to bring this cosmopolitan perspective to bear in this text. Direct personal applications of strategy concepts to careers anp lives to help internalize the content (incluping the popular myStrategy mopules at the enp of each chapter). Industry-leading digital delivery option (Create), adaptive learning system (SmartBoo-), anp online assignment and assessment system (Connect). Stanpalone mopule on How to Conduct a Case Analysis. High-quality Cases, well integratep with text chapters anp stanparpizep, high-quality and detailed teaching notes; there are three types of cases that come with this text: 12 ChapterCases begin anp enp each chapter, framing the chapter topic anp content. 12 MiniCases in Part 4 of the boo-, with one MiniCase tailorep specifically to each chapter with accompanying piscussion questions. All of the cases are basep on original research, provipe pynamic opportunities for stupents to apply strategy concepts by assigning them in conjunction with specific chapters, anp can be usep in a variety of ways (as inpivipual assignments, group wor-, anp in class). 22 full-length Cases, authorep or co-authorep by Fran- T. Rothaermel specifically to accompany this text; 12 of these cases are inclupep complimentary in 5e Connect. ■ ■ ■ I have ta-en great pripe in authoring all the case materials that accompany this text. This appitional touch is a pifferentiating feature from other offerings on the mar-et anp allows for strict quality control anp seamless integration with chapter content. All case materials come with sets of questions to stimulate class piscussion anp provipe guipance for written assignments. High-quality case teaching notes that more fully integrate content anp cases are available to instructors in the Connect Library. In appition to these in-text cases, McGraw-Hill’s custom-publishing Create program offers all of the cases anp teaching notes accompanying the current as well as prior epitions (www.mcgrawhillcreate.com/rothaermel). What’s New in the Fifth Edition? I have revisep anp uppatep the new epition in the following ways, many of which were inspirep by conversations anp feepbac- from the many users anp reviewers of the prior epitions. OVERVIEW OF MAJOR CHANGES IN 5E ■ ■ ■ ■ Section “Sta-eholper Strategy anp Competitive Apvantage” now in Chapter 1. Section “Vision, Mission, anp Values” now in Chapter 2. New section “Strategic Decision Ma-ing” in Chapter 2. New section “From External to Internal Analysis” in Chapter 4. rot6128x_fm_i-xxviii_1.indd 15 12/4/19 9:26 AM xvi PREFACE ■ ■ ■ ■ ■ Three new ChapterCases: Five Guys (Chapter 4), Alphabet and Goo2le (Chapter 11), and Theranos (Chapter 12); all other ChapterCases revised and updated. All new or updated and revised Strategy Highlights (two per chapter). Revised and updated module on How to Conduct a Case Analysis. Five new MiniCases (Uber, PayPal, JCPenney, GE, and BlackBerry), featurin2 not only success stories but also failures; all other MiniCases revised and updated. One MiniCase per chapter, ti2htly inte2rated with learnin2 objectives. Detailed and hi2h-quality teachin2 notes are available in the Connect Library. Three new full-length Cases (Airbnb, Nike, and The Van2uard Group); all other cases includin2 most popular ones such as Amazon, Apple, Best Buy, Facebook, McDonald’s, and Tesla, amon2 others, are revised and updated. Detailed and updated case teachin2 notes, as well as financial data for these cases, are available in the Connect Library. IN DETAIL CHAPTER 1 ■ ■ ■ ■ Revised and updated ChapterCase: “Tesla’s Secret Strate2y” New Strate2y Hi2hli2ht: “Does Twitter have a Strate2y?” New Strate2y Hi2hli2ht: “Merck’s Stakeholder Strate2y” Improved chapter flow throu2h movin2 the updated section “Stakeholder Strate2y and Competitive Advanta2e” into Chapter 1 (from Chapter 2) CHAPTER 2 ■ ■ ■ ■ ■ ■ Revised and updated ChapterCase: “Leadership Crisis at Facebook?” New section: “Strate2ic Decision Makin2” New exhibit: “Two Distinct Modes of Decision Makin2” New exhibit: “How to Use a Devil’s Advocate to Improve Strate2ic Decision Makin2” New Strate2y Hi2hli2ht: “Teach for America: How Wendy Kopp Inspires Future Leaders” Improved chapter flow throu2h movin2 the updated section “Vision, Mission, and Values” into Chapter 2 (from Chapter 1) CHAPTER 3 ■ ■ ■ Revised and updated ChapterCase: “Airbnb: Disruptin2 the Hotel Industry” New Strate2y Hi2hli2ht: “Blockbuster’s Bust” New Strate2y Hi2hli2ht: “From Lea2ue of Le2ends to Fortnite: The Rise of e-Sports” CHAPTER 4 ■ ■ ■ rot6128x_fm_i-xxviii_1.indd 16 New ChapterCase: “Five Guys’ Core Competency: ‘Make the Best Bur2er, Don’t Worry about Cost’” New section: “From External to Internal Analysis” New Strate2y Hi2hli2ht: “Dr. Dre’s Core Competency: Coolness Factor” 12/5/19 11:03 AM PREFACE xvii CHAPTER 5 ■ ■ Revised and updated ChapterCase: “The Quest for Competitive Advantage: Apple vs. Microsoft” New Strategy Highlight: “PepsiCo’s Indra Nooyi: Performance with a Purpose” CHAPTER 6 ■ ■ Revised and updated ChapterCase: “JetBlue Airways: En Route to a New Blue Ocean?” New Strategy Highlight: “Cirque du Soleil: Finding a New Blue Ocean?” CHAPTER 7 ■ ■ Revised and updated ChapterCase: “Netflix: Disrupting the TV Industry” New Strategy Highlight: “Wikipedia: Disrupting the Encyclopedia Business” CHAPTER 8 ■ ■ Revised and updated ChapterCase: “Amazon's Corporate Strategy” New Strategy Highlight: “P&G Diversification Strategy: Turning the Tide?” CHAPTER 9 ■ Revised and updated ChapterCase: “Little Lyft Gets Big Alliance Partners and Beats Uber in Going Public” CHAPTER 10 ■ ■ Revised and updated ChapterCase: “IKEA: The World’s Most Profitable Retailer” New Strategy Highlight “Does GM’s future lie in China?” CHAPTER 11 ■ ■ ■ New ChapterCase: “‘A’ is for Alphabet and ‘G’ is for Google” New exhibit: “Formal and Informal Building Blocks of Organizational Design” New Strategy Highlight: “Zappos: Of Happiness and Holacracy” CHAPTER 12 ■ ■ ■ New ChapterCase: “Theranos: Bad Blood” New Strategy Highlight: “HP’s Board Room Drama and Divorce” New Strategy Highlight: “VW’s Dieselgate: School of Hard NOx” MINICASES ■ ■ ■ 12 MiniCases, one for each chapter; each MiniCase is closely tied to the chapter’s learning objectives and includes discussion questions and detailed teaching notes. Five new MiniCases: Uber, PayPal, JCPenney, GE, and BlackBerry The most popular MiniCases from the prior editions have been updated and revised. rot6128x_fm_i-xxviii_1.indd 17 11/26/19 7:34 PM xviii PREFACE FULL-LENGTH CASES ■ ■ Three new full-length cases (Airbnb, Nike, and The Vanguard Group); all other cases, including most popular ones such as Amazon, Apple, Best Buy, Facebook, McDonald’s, and Tesla, are updated and revised. Detailed and updated case teaching notes as well as financial data for these cases are available for instructors in the Connect Library. CONNECT ■ 12 full-length Cases are now included—complimentary—for students in 5e Connect. Detailed case teaching notes are available in the Connect Library. All full-length cases included in 5e Connect were authored by Frank T. Rothaermel. Connect, McGraw-Hill’s online assignment and assessment system, offers a wealth of content for both students and instructors. Assignable activities include the following: ■ ■ SmartBook, one of the first fully adaptive and individualized study tools, provides students with a personalized learning experience, giving them the opportunity to practice and challenge their understanding of core strategy concepts. It allows the instructor to set up all assignments prior to the semester, to have them auto-released on preset dates, and to receive auto-graded progress reports for each student and the entire class. Students love SmartBook because they learn at their own pace, and it helps them to study more efficiently by delivering an interactive reading experience through adaptive highlighting and review. Application Exercises (such as Whiteboard Animation video cases, MiniCase case analyses, click-and-drag activities, and new case exercises for all 12 full-length cases that are available in Connect) require students to apply key concepts, thereby closing the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor. INSTRUCTOR RESOURCES The Instructor Resources located in Connect provide the following teaching tools, all of which have been tested and updated with this edition: ■ ■ ■ rot6128x_fm_i-xxviii_1.indd 18 The Teacher’s Resource Manual (TRM) includes thorough coverage of each chapter, as well as guidance for integrating Connect—all in a single resource. Included in this newly combined TRM, which retains favorite features of the previous edition’s Instructor’s Manual, is the appropriate level of theory, framework, recent application, additional company examples not found in the textbook, teaching tips, PowerPoint references, critical discussion topics, and answers to end-of-chapter exercises. The PowerPoint (PPT) slide decks, available in an accessible version for individuals with visual impairment, provide comprehensive lecture notes, video links, and additional company examples not found in the textbook. Options include instructor mediaenhanced slides as well as notes with outside application examples. All slides can be edited by individual instructors to suit their needs. The Test Bank includes 100 to 150 questions per chapter, in a range of formats and with a greater-than-usual number of comprehension, critical-thinking, and application or scenario-based questions. Each question is tagged to learning objectives, Bloom’s Taxonomy levels, and AACSB compliance requirements. Many questions are new and written especially for this new edition. 11/26/19 7:34 PM PREFACE ■ xix The Video Guide includes video links that relate to concepts from chapters. The video links include sources such as Big Think, Stanford University’s Entrepreneurship Corner, The McKinsey Quarterly, ABC, BBC, CBS, CNN, ITN/Reuters, MSNBC, NBC, PBS, and YouTube. CREATE ■ ■ Create, McGraw-Hill’s custom-publishing tool, is where you access additional fulllength cases (and Teaching Notes) beyond those included complimentary in Connect that accompany Strategic Management (http://www.mcgrawhillcreate.com/Rothaermel). You can create customized course packages in print and/or digital form at a competitive price point. Through Create, you will be able to select from all author-written cases as well instructor-written cases that match specifically with the new 5th edition. Create also contains cases from Harvard, Ivey Darden, NACRA, and much more! You can assemble your own course, selecting the chapters, cases (multiple formats), and readings that will work best for you, or choose from several ready-to-go, author-recommended complete course solutions, which include chapters, cases, and readings, preloaded in Create. Among the preloaded solutions, you’ll find options for undergraduate, MBA, accelerated, and other strategy courses. rot6128x_fm_i-xxviii_1.indd 19 11/26/19 7:34 PM ACKNOWLEDGMENTS Any list of acknowledgments will always be incompletev but I would like to thank some special people without whom this product would not have been possible. First and foremostv my wifev Kelleynv and our children: Harrisv Winstonv Romanv Adelaidev Averyv and Ivy. Over the last few yearsv I have worked longer hours than when I was a graduate student to conduct the research and writing necessary for this text and accompanying case studies and other materials. I sincerely appreciate the sacrifice this has meant for my family. The Georgia Institute of Technology provides a conducivev intellectual environment and superb institutional support to make this project possible. I thank Russell and Nancy McDonough for generously funding the endowed chair that I am honored to hold. I’m grateful for Dean Maryam Alavi and Senior Associate Deans Saby Mitra and Peter Thompson for providing the exceptional leadership that allows faculty to focus on researchv teachingv and service. I like to thank my colleagues at Georgia Tech—all of whom are not only great scholars but also fine individuals whom I’m fortunate to have as friends: Marco Ceccagnoliv Annamaria Contiv Anne Fullerv Jonathan Giulianov Stuart Grahamv Matt Higginsv David Kuv John McIntyrev Alex Oettlv Pian Shuv Eunhee Sohnv and Laurina Zhang. I’m also fortunate to work with a great team at McGraw-Hill: Michael Ablassmeir (director)v Terri Schiesl (managing director)v Anne Ehrenworth (senior product developer)v Haley Burmeister (product developer)v Debbie Clare (executive marketing manager)v Mary Powers and Keri Johnson (content project managers)v and Matt Diamond (senior designer). Lai T. Moy contributed as a superb content development editor on the fifth edition manuscript; and I’m grateful for excellent research assistance provided by Laura Zhang. I’m more than grateful for the contributions of great colleagues on various resources that accompany this new edition of Strategic Management: ■ ■ ■ ■ ■ ■ John Burr (Purdue University) on the Video Guide. Carla Flores (Ball State University) on the revision of Connectv including the Interactive Exercisesv MiniCase Exercisesv and Case Exercises. Melissa Francisco (University of Central Florida) on the accessible PowerPoint slide decks. Anne Fuller (Georgia Institute of Technology) on Teacher Resource Manual, Discussion Questions, and myStrategy boxes. Gita Mathur (San Jose State University) on MiniCase Teaching Notes. Chandran Mylvaganam (Northwood University) on selected Case Abstracts and Case Teaching Notes. Lastv but certainly not leastv I wish to thank the reviewers and focus group attendees who shared their expertise with usv from the very beginning when we developed the prospectus to the new teaching and learning package that you hold in your hands. The reviewers have given us the greatest gift of all—the gift of time! These very special people are listed starting on page xxi. Frank T. Rothaermel Georgia Institute of Technology Web: ftrStrategy.com Email: frank@ftrStrategy.com xx rot6128x_fm_i-xxviii_1.indd 20 12/3/19 12:02 PM THANK YOU . . . This book has gone through McGraw-Hill Education’s thorough development process. Over the course of several years, the project has benefited from numerous developmental focus groups, hundreds of reviews from instructors across the country, and beta-testing of the firstedition manuscript as well as market reviews of subsequent editions on a variety of campuses. The author and McGraw-Hill wish to thank the following people who shared their insights, constructive criticisms, and valuable suggestions throughout the development of this project. Your contributions have greatly improved this product: Joshua R. Aaron East Carolina University Moses Acquaah University of North Carolina, Greensboro Seung Bach California State University, Sacramento Heidi Bertels City University of New York, Staten Island Jeffery Bailey University of Idaho Lorenzo Bizzi California State University, Fullerton Garry Adams Auburn University David Baker Kent State University M. David Albritton Northern Arizona University LaKami T. Baker Auburn University Benjamin N. Alexander California Polytechnic State University Dennis R. Balch University of North Alabama Brent B. Allred The College of William & Mary Edward R. Balotsky Saint Joseph’s University Semiramis Amirpour University of Texas, El Paso Kevin Banning Auburn University, Montgomery Cory J. Angert University of Houston-Downtown Jeff Barden Oregon State University Melissa Appleyard Portland State University James W. Barrow Suffolk University Jorge A. Arevalo William Paterson University Patricia Beckenholdt University of Maryland University College Asli Arikan Kent State University Marne Arthaud-Day Kansas State University Geoff Bell University of Minnesota, Duluth Bindu Arya University of Missouri, St. Louis Bruce W. Bellner The Ohio State University Audrey M. Blume, D.B.A. Wilmington University Tim Blumentritt Kennesaw State University William C. Bogner Georgia State University David S. Boss Ohio University Michael Bowen University of South Florida Nathan A. Bragaw Louisiana State University Dorothy Brawley Kennesaw State University Wm. David Brice California State University, Dominguez Hills Michael G. Brizek South Carolina State University James W. Bronson University of Wisconsin, Whitewater Jill A. Brown Bentley University xxi rot6128x_fm_i-xxviii_1.indd 21 11/26/19 7:34 PM xxii THANK YOU . . . Barry Bunn Valencia College Anne N. Cohen University of Minnesota Richard A. L. Caldarola Troy University Jamie Collins University of Canterbury Marco Ceccagnoli Georgia Institute of Technology Janice F. Cerveny Florida Atlantic University Clint Chadwick University of Alabama, Huntsville W. J. Conwell University of Texas at El Paso Rick Corum Liberty University Kenneth H. Chadwick Nicholls State University Eva Lynn Cowell University of Tennessee Jay P. Chandran Northwood University Cynthia S. Cycyota United States Air Force Academy Jianhong Chen University of New Hampshire rot6128x_fm_i-xxviii_1.indd 22 Brian Connelly Auburn University Derrick E. D’Souza University of North Texas Tianxu Chen Oakland University Joshua J. Daspit Texas State University Yi-Yu Chen New Jersey City University Parthiban David American University Mike Cheng Golden Gate University Samuel DeMarie Iowa State University Steve Childers Radford University Irem Demirkan Northeastern University Sanjib Chowdhury Eastern Michigan University Geoffrey Desa San Francisco State University Valerie L. Christian Sacred Heart University Edward Desmarais Salem State University Brent Clark University of South Dakota Steven S. Dionne Georgia State University Timothy S. Clark Northern Arizona University Michael E. Dobbs Eastern Illinois University John Clarry Rutgers University Mark Dobeck Cleveland State University Betty S. Coffey Appalachian State University Darla Domke-Damonte Coastal Carolina University Stephen A. Drew Florida Gulf Coast University Mohinder Dugal Western Connecticut State University Arthur J. Duhaime III Nichols College David Duhon University of Southern Mississippi Danielle Dunne Fordham University Supradeep Dutta State University of New York, Buffalo Loretta S. Duus Midlands Technical College Jason Scott Earl Brigham Young University, Hawaii Andrew G. Earle University of New Hampshire Helen Eckmann Brandman University Linda F. Edelman Bentley University Alan Ellstrand University of Arkansas, Fayetteville David Epstein University of Houston Downtown Michael M. Fathi Georgia Southwestern State University Kevin Fertig University of Illinois at Urbana, Champaign James Fiet University of Louisville 11/26/19 7:34 PM THANK YOU . . . Robert S. Fleming Rowan University Devi R. Gnyawali Virginia Tech Duane Helleloid University of North Dakota Carla C. Flores Ball State University Sanjay Goel University of Minnesota, Duluth Kurt A. Heppard United States Air Force Academy Steve Gove University of Vermont Theodore T. Herbert Rollins College Susan Fox-Wolfgramm Hawaii Pacific University Patrick Greek Macomb Community College Kurt Herrmann Brigham Young University William Foxx Troy University Shirley A. Green Indian River State College Charla S. Fraley Columbus State Community College Regina A. Greenwood Nova Southeastern University W.A. Franke Northern Arizona University Christin Van Wyk Greiman Northwood University Glenn Hoetker The University of Melbourne Robert D. Gulbro Athens State University Phyllis Holland Valdosta State University Michael Gunderson University of Florida R. Michael Holmes, Jr. Florida State University Craig Gustin American InterContinental University Stephen V. Horner Arkansas State University Daniel Forbes University of Minnesota Isaac Fox University of Minnesota Steven A. Frankforter Winthrop University Anne W. Fuller Georgia Institute of Technology Venessa Funches Auburn University, Montgomery Jeffrey Furman Boston University Nolan Gaffney University of North Texas Scott Gallagher James Madison University Stephen F. Hallam University of Akron Marcia McLure Hardy Northwestern State University, Louisiana Darel Hargrove Central Michigan University Ken Hess Metropolitan State University Scott Hicks Liberty University George Hruby Cleveland State University Tammy Huffman Utah Valley University Tobias M. Huning University of North Florida Ahma Hassan Morehead State University Tammy G. Hunt University of North Carolina Wilmington John E. Gentner University of Dayton Scott D. Hayward Elon University / Appalachian State University Ana Elisa Iglesias University of Wisconsin, La Crosse Jim Glasgow Villanova University Jon Timothy Heames West Virginia University Eric Glymph Virginia Commonwealth University Richard A. Heiens University of South Carolina, Aiken Syeda Noorein Inamdar The Chinese University of Hong Kong David L. Gartenberg Seattle University rot6128x_fm_i-xxviii_1.indd 23 xxiii John G. Irwin Troy University 11/26/19 7:34 PM xxiv THANK YOU . . . Carol K. Jacobson Purdue University Melody Waller LaPreze Missouri State University Paul Mallette Colorado State University Sean Jasso University of California, Riverside K. Blaine Lawlor University of West Florida Tatiana S. Manolova Bentley University Scott Johnson Oklahoma State University Marty Lawlor Rochester Institute of Technology Daniel B. Marin Louisiana State University Mahesh P. Joshi George Mason University John Lawrence University of Idaho Jon Kalinowski Minnesota State University, Mankato Mariana J. Lebrn Towson University Necmi Karagozoglu California State University, Sacramento Joy Karriker East Carolina University J. Kay Keels Coastal Carolina University Franz Kellermanns University of North Carolina, Charlotte Theodore A. Khoury Portland State University David King Iowa State University Jay Lee California State University Sacramento Mina Lee Xavier University Mingxiang Lee Florida Atlantic University Louis Martinette University of Mary Washington Anthony U. Martinez San Francisco State University Blake Mathias Louisiana State University Gita Mathur San Jose State University Patricia Matuszek Troy University, Montgomery Charles J. F. Leflar University of Arkansas, Fayetteville David McCalman University of Central Arkansas Jon Lehman Vanderbilt University Jeffrey E. McGee The University of Texas, Arlington Brent Kinghorn Missouri State University David Leibsohn California State University, Fullerton Jerry Kopf Radford University Aristotle T. Lekacos Stony Brook University Rick McPherson University of Washington Donald J. Kopka, Jr. Towson University Jun Lin State University of New York, New Paltz Michael Merenda University of New Hampshire Eduardo V. Lopez, Ph.D. Belmont University John M. Mezias University of Miami Joseph Mahoney University of Illinois at Urbana-Champaign Grant Miles University of North Texas Frank Kozak Bowling Green State University Mario Krenn Louisiana State University Bruce C. Kusch Brigham Young University, Idaho rot6128x_fm_i-xxviii_1.indd 24 Hun Lee George Mason University Sarah Marsh Northern Illinois University David Major University of Miami Jean McGuire Louisiana State University Douglas R. Miller University of North Carolina, Wilmington 11/26/19 7:34 PM THANK YOU . . . Michael Miller University of Illinois, Chicago Kuei-Hsien Niu California State University, Sacramento Antoaneta Petkova San Francisco State University Elouise Mintz Saint Louis University Jill Novak Indian River State College JoDee Phillips Kaplan University Raza Mir William Paterson University Frank Novakowski Davenport University Michael W. Pitts Virginia Commonwealth University Kelly Mollica University of Memphis Jeffrey R. Nystrom University of Colorado Denver Mike Montalbano Bentley University Kevin J. O’Mara Elon University Debra L. Moody Virginia Commonwealth University Kenny (Kyeungrae) Oh University of Missouri, St. Louis Gwen Moore University of Missouri, St. Louis Don Okhomina Fayetteville State University James P. Morgan Webster University, Fort Leonard Wood Richard T. Mpoyi Middle Tennessee State University John Mullane Middle Tennessee State University Canan C. Mutlu Kennesaw State University Chandran Mylvaganam Northwood University Eren Ozgen Troy University-Dothan Chris Papenhausen University of Massachusetts, Dartmouth James M. Pappas Oklahoma State University Audrey Parajon Wilmington University Ronaldo Parente Florida International University Srikanth Paruchuri Pennsylvania State University Erin Pleggenkuhle-Miles University of NebraskaOmaha Robert Porter University of Central Florida Richard A. Quinn University of Central Florida Vasudevan Ramanujam Case Western Reserve University Krishnan Ramaya Pacific University Annette L. Ranft Auburn University Christopher R. Reutzel Sam Houston State University Gary B. Roberts Kennesaw State University Simon Rodan San Jose State University Donald Roomes Florida International University Louise Nemanich Arizona State University Christine Cope Pence University of California, Riverside Don O. Neubaum Oregon State University Luis A. Perez-Batres Central Michigan University Yassir M. Samra Manhattan College Kent Neupert Boise State University Clifford R. Perry Florida International University Carol Sánchez Grand Valley State University Keith Perry San Jose State University Michael D. Santoro Lehigh University Charles Newman University of Maryland University College rot6128x_fm_i-xxviii_1.indd 25 xxv Jessica R. Salmon Rutgers University 11/26/19 7:34 PM xxvi THANK YOU . . . Tim Schoenecker Southern Illinois University, Edwardsville Elton Scifres Stephen F. Austin State University Gary Scudder Vanderbilt University Wendell Seaborne Franklin University Deborah Searcy Florida Atlantic University Russell Seidle Suffolk University, Boston Jim Sena California Polytechnic State University, San Luis Obispo Ned Smith University of Michigan James D. Spina University of Maryland Peter A. Stanwick Auburn University Mark Starik San Francisco State University Warren Stone University of Arkansas, Little Rock Mohan Subramaniam Boston College Beverly B. Tyler North Carolina State University Isaiah O. Ugboro North Carolina A&T State University Tolga Ulusemre Hawaii Pacific University Barry VanderKelen California Polytechnic State University, San Luis Obispo Jorge Walter The George Washington University Bruce Walters Louisiana Tech University Ram Subramanian Montclair State University Jia Wang California State University, Fresno James Anthony Swaim Kennesaw State University David B. Wangrow Marquette University Jennifer Sexton West Virginia University Timothy Syfert Grand Valley State University Andrew Ward Lehigh University Ali Shahzad James Madison University Jing’an Tang Sacred Heart University Mark Sharfman University of Oklahoma Linda F. Tegarden Virginia Tech Joel West Claremont Graduate University Thomas Shirley San Jose State University Robert Thompson University of Texas, San Antonio Laura Whitcomb California State University, Los Angeles Eugene S. Simko Monmouth University Paul W. Thurston, Jr. Siena College George O. White III University of Michigan, Flint Faye A. Sisk Mercer University, Atlanta Thuhang Tran Middle Tennessee State University Margaret White Oklahoma State University Anju Seth Virginia Tech Deepak Sethi Old Dominion University Lise Anne D. Slatten University of Louisiana, Lafayette Alan D. Smith Kent State University/Robert Morris University rot6128x_fm_i-xxviii_1.indd 26 Garry D. Smith Mississippi State University Kim K. J. Tullis University of Central Oklahoma Rashada Houston Turner Florida A&M University Vincent Weaver Greenville Technical College Marta Szabo White Georgia State University Carolyn Wiethoff Indiana University Scott Williams Wright State University 11/26/19 7:34 PM THANK YOU . . . James Winters Portland State University Chuanyin Xie The University of Tampa Zhe Zhang Eastern Kentucky University Ross A. Wirth Franklin University George Young Liberty University Cathy Coleman Wood University of Tennessee John Yudelson California State University Northridge Xia Zhao California State University, Dominguez Hills Robert Chapman Wood San Jose State University Beth Woodard Belmont University rot6128x_fm_i-xxviii_1.indd 27 Michael J. Zhang Sacred Heart University xxvii Yanfeng Zheng The University of Hong Kong Arvids A. Ziedonis KU Leuven 11/26/19 7:34 PM ® FOR INSTRUCTORS You’re in the driver’s seat. Want to build your own course? No problem. Prefer to use our turnkey, prebuilt course? Easy. Want to make changes throughout the semester? Sure. And you’ll save time with Connect’s auto-grading too. 65% Less Time Grading They’ll thank you for it. Adaptive study resources like SmartBook® 2.0 help your students be better prepared in less time. You can transform your class time from dull definitions to dynamic debates. Find out more about the powerful personalized learning experience available in SmartBook 2.0 at www.mheducation.com/highered/ connect/smartbook Laptop: McGraw-Hill; Woman/dog: George Doyle/Getty Images Make it simple, make it affordable. Solutions for your challenges. Connect makes it easy with seamless integration using any of the major Learning Management Systems— Blackboard®, Canvas, and D2L, among others—to let you organize your course in one convenient location. Give your students access to digital materials at a discount with our inclusive access program. Ask your McGraw-Hill representative for more information. A product isn’t a solution. Real solutions are affordable, reliable, and come with training and ongoing support when you need it and how you want it. Our Customer Experience Group can also help you troubleshoot tech problems— although Connect’s 99% uptime means you might not need to call them. See for yourself at status. mheducation.com Padlock: Jobalou/Getty Images Checkmark: Jobalou/Getty Images rot6128x_fm_i-xxviii_1.indd 28 11/26/19 7:34 PM FOR STUDENTS Effective, efficient studying. Connect helps you be more productive with your study time and get better grades using tools like SmartBook 2.0, which highlights key concepts and creates a personalized study plan. Connect sets you up for success, so you walk into class with confidence and walk out with better grades. Study anytime, anywhere. Download the free ReadAnywhere app and access your online eBook or SmartBook 2.0 assignments when it’s convenient, even if you’re offline. And since the app automatically syncs with your eBook and SmartBook 2.0 assignments in Connect, all of your work is available every time you open it. Find out more at www.mheducation.com/readanywhere “I really liked this app—it made it easy to study when you don't have your textbook in front of you.” - Jordan Cunningham, Eastern Washington University No surprises. The Connect Calendar and Reports tools keep you on track with the work you need to get done and your assignment scores. Life gets busy; Connect tools help you keep learning through it all. Calendar: owattaphotos/Getty Images Learning for everyone. McGraw-Hill works directly with Accessibility Services Departments and faculty to meet the learning needs of all students. Please contact your Accessibility Services office and ask them to email accessibility@mheducation.com, or visit www.mheducation.com/about/accessibility for more information. Top: Jenner Images/Getty Images, Left: Hero Images/Getty Images, Right: Hero Images/Getty Images rot6128x_fm_i-xxviii_1.indd 1 11/26/19 7:34 PM PART 1 rot6128x_ch01_002-031.indd 2 Analysis CHAPTER 1 What Is Strategy? 4 CHAPTER 2 Strategic Leadership: Managing the Strategy Process 32 CHAPTER 3 External Analysis: Industry Structure, Competitive Forces, and Strategic Groups 72 CHAPTER 4 Internal Analysis: Resources, Capabilities, and Core Competencies 116 CHAPTER 5 Competitive Advantage, Firm Performance, and Business Models 154 12/5/19 7:53 AM CHAPTER 1 What Is Strategy? Chapter Outline Learning Objectives 1.1 After studying this chapter, you should be able to: What Strategy Is: Gaining and Sustaining Competitive Advantage Crafting a Good Strategy at Tesla What Is Competitive Advantage? 1.2 Stakeholder Strategy and Competitive Advantage LO 1-1 Explain the role of strategy in a firm’s quest for competitive advantage. LO 1-2 Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity. LO 1-3 Assess the relationship between stakeholder strategy and sustainable competitive advantage. LO 1-4 Conduct a stakeholder impact analysis. LO 1-5 Explain the Analysis, Formulation, Implementation (AFI) Strategy Framework. Value Creation Stakeholder Strategy Stakeholder Impact Analysis 1.3 The Analysis, Formulation, Implementation (AFI) Strategy Framework Key Topics and Questions of the AFI Strategy Framework 1.4 Implications for Strategic Leaders 4 rot6128x_ch01_002-031.indd 4 01/11/19 11:23 AM CHAPTERCASE 1 Part I Tesla’s Secret Strategy end of 2018, it had sold more than 250,000 of the Model S worldwide. Hoping for an even broader customer appeal, Tesla also TESLA INC., an American manufacturer of all-electric introduced the Model X, a crossover between an SUV and a cars—boasted a market capitalization1 of some $60 billion family van with futuristic falcon-wing doors for convenient (in early 2019), an appreciation of more than 1,400 peraccess to second- and third-row seating. The $100,000 startcent over its initial public offering price in 2010. How can ing sticker price of the Model X is quite steep, thus limiting a California startup achieve a market valuation that exits mass-market appeal. Technical difficulties with its innovaceeds that of GM, one of the largest car manufacturers in tive doors delayed its launch until the fall of 2015. By the the world, making some 10 million vehicles a year? The end of 2018, however, Tesla had sold more than 100,000 of answer: Tesla’s secret strategy. In a summer 2006 blog enthe Model X globally. try on Tesla’s website, Elon Tesla also completed Step Musk, Tesla’s co-founder 3 of its master plan. In 2016, and CEO, explained the the electric car maker unstartup’s master plan:2 veiled the Model 3, an allelectric compact luxury 1. Build sports car. sedan, with a starting price 2. Use that money to build of $35,000. Many want-to-be an affordable car. Tesla owners stood in line 3. Use that money to build overnight, eagerly waiting for an even more affordable Tesla stores to open so they car. could put down their $1,000 deposits to secure a spot on 4. While doing above, also the waiting list for the Model provide zero-emission 3—a car they had not even electric power generaseen, let alone taken for a test tion options. drive. As a result of this conThe Tesla Roadster 2 set new records for a vehicle to be driven 5. Don’t tell anyone.2 sumer enthusiasm, Tesla reon public roads: It goes from 0–60 mph in 1.9 seconds and from 0–100 mph in 4.2 seconds, with top speeds of well above 250 Let’s see if Tesla stuck to ceived more than 500,000 mph. The base price of this newest Tesla, scheduled to launch its strategy. In 2008, Tesla inpreorders before the first dein 2020, is $200,000. troduced its first car: the livery, and thus $500 million KYDPL KYODO/AP Images Roadster, a $110,000 sports in interest-free loans. Despite coupe with faster acceleration than a Porsche or a Ferrari. initial difficulties in scaling up production, deliveries of the Tesla’s first vehicle served as a prototype to demonstrate Model 3 began in the fall of 2017. By the end of 2018, Tesla that electric vehicles can be more than mere golf carts. Tesla had delivered more than 100,000 of the Model 3 globally. To thus successfully completed Step 1 of the master plan. meet the strong demand for the lower priced Model 3, Tesla In Step 2, after selling some 2,500 Roadsters, Tesla hopes to increase its annual production to 1 million vehicles discontinued its production in 2012 to focus on its next by 2020. car: the Model S, a four-door family sedan, with an initial In the spring of 2019, Tesla launched the Model Y, a base price of $73,500. The line appeals to a somewhat compact SUV that is a smaller and much lower priced verlarger market and thus allows for larger production runs to sion of the Model X. Elon Musk plans to start deliveries of drive down unit costs. The Model S received an outstandthe new Model Y between the fall of 2020 and spring 2021, ing market reception. It was awarded not only the 2013 with the entry version starting at $39,000 (and 230 miles Motor Trend Car of the Year, but also received the highest range) and the high-end performance version starting at score of any car ever tested by Consumer Reports $60,000 (and 280 miles range). (99/100). Tesla manufactures the Model S in the Fremont, Step 4 of Musk’s master plan for Tesla aims to provide California, factory that it purchased from Toyota. By the zero-emission electric power generation options. To achieve 5 rot6128x_ch01_002-031.indd 5 01/11/19 11:23 AM this goal, Tesla acquired SolarCity, a solar energy company, for more than $2 billion in the fall of 2016. This successful integration of Tesla and SolarCity, which resulted in the first fully integrated clean-tech energy company that combines solar power, power storage, and transportation, marks the completion of Step 4 in Tesla’s master plan. strategic management An integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage. LO 1-1 Explain the role of strategy in a firm’s quest for competitive advantage. strategy The set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors. Step 5: “Don’t tell anyone”—a humorous statement added by Elon Musk—thus the ChapterCase title “Tesla’s Secret Strategy.”3 NOTE: By summer 2019, Tesla’s market cap stood at about $45 billion. Part II of this ChapterCase appears in Section 1.4. WHY IS TESLA SO SUCCESSFUL? In contrast to Tesla’s success, the big-three U.S. automakers—Ford, GM, and Chrysler—struggled during the first decade of the 21st century, with both GM and Chrysler filing for bankruptcy protection. If once-great firms can fail, why is any company successful? What enables some firms to gain and then sustain their competitive advantage over time? How can you as a strategic leader influence firm performance? These are the big questions that define strategic management. Answering these questions requires integrating the knowledge you’ve obtained in your studies of various business disciplines to understand what leads to superior performance, and how you can help your organization achieve it. Strategic management is the integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage. Mastery of strategic management enables you to view an organization such as a firm or a nonprofit outfit in its entirety. It also enables you to think like a general manager to help position your organization for superior performance. The AFI Strategy Framework embodies this view of strategic management. It will guide our exploration of strategic management through the course of your study. In this chapter, we lay the groundwork for the study of strategic management. We’ll introduce foundational ideas about strategy and competitive advantage. We also move beyond an understanding of competitive advantage solely as superior financial performance, and introduce the concept of stakeholder strategy. This allows us to appreciate the role of business in society more broadly. Next, we take a closer look at the components of the AFI framework and provide an overview of the entire strategic management process. We conclude this introductory chapter, as we do with all others in this text, with a section titled Implications for Strategic Leaders. Here we provide practical applications and considerations of the material developed in the chapter. Let’s begin the exciting journey to understand strategic management and competitive advantage. 1.1 What Strategy Is: Gaining and Sustaining Competitive Advantage Strategy is a set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors.4 To achieve superior performance, companies compete for resources: New ventures compete for financial and human capital, existing companies compete for profitable growth, charities compete for donations, universities compete for the best students and professors, sports teams compete for championships, while celebrities compete for endorsements. As highlighted in the ChapterCase, Tesla, a new entrant in the automotive industry, is competing for customers with established U.S. companies such as GM, Ford, and Chrysler and also with foreign automakers Toyota, Honda, Nissan, Hyundai, VW, Audi, Porsche, 6 rot6128x_ch01_002-031.indd 6 01/11/19 11:23 AM CHAPTER 1 Mercedes, and BMW, amonu others. In any competitive situation, a good strategy enables a firm to achieve superior performance and sustainable competitive advantaue relative to its competitors. A uood strateuy is based on a strateuic manauement process that consists of three key elements: 1. A diagnosis of the competitive challenue. This element is accomplished throuuh analysis of the firm’s external and internal environments (Part 1 of the AFI framework). 2. A guiding policy to address the competitive challenue. This element is accomplished throuuh strateuy formulation, resultinu in the firm’s corporate, business, and functional strateuies (Part 2 of the AFI framework). 3. A set of coherent actions to implement the firm’s uuidinu policy. This element is accomplished throuuh strateuy implementation (Part 3 of the AFI framework). CRAFTING A GOOD STRATEGY AT TESLA What Is Strategy? 7 good strategy Enables a firm to achieve superior performance and sustainable competitive advantage relative to its competitors. It is based on a strategic management process that consists of three elements: (1) a diagnosis of the competitive challenge; (2) a guiding policy to address the competitive challenge; and (3) a set of coherent actions to implement a firm’s guiding policy. Let’s revisit ChapterCase 1 to see whether Tesla is pursuinu a uood strateuy. Tesla appears to be performinu quite well when considerinu indicators such as stock appreciation, where it outperforms its competitors. The appreciation of Tesla stock since its initial public offerinu (IPO) points to investors’ expectations of future urowth. By other measures, such as ueneratinu profits, Tesla underperforms compared to established car companies. Losses are common for startups early on, especially if the business requires larue upfront investments such as buildinu new and retoolinu existinu factories, which Tesla was required to do. What we can say at this point is that Tesla seems to be startinu with a promisinu strateuy and is in the process of achievinu superior performance relative to its competitors. But can Tesla sustain this superior performance over time? Let’s use the three elements of uood strateuy to explore this question. THE COMPETITIVE CHALLENGE. A uood strateuy needs to start with a clear and critical diaunosis of the competitive challenue. Musk, Tesla’s co-founder and CEO, describes himself as an “enuineer and entrepreneur who builds and operates companies to solve environmental, social, and economic challenues.”5 Tesla was founded with the vision to “accelerate the world’s transition to sustainable transport.”6 To accomplish this mission, Tesla must build zero-emission electric vehicles that are attractive and affordable. Beyond achievinu a competitive advantaue for Tesla, Musk is workinu to set a new standard in automotive technolouy. He hopes that zero-emission electric vehicles will one day replace uasoline-powered cars. Tesla’s competitive challenue is sizable: To succeed it must manufacture attractive and affordable vehicles usinu its new technolouy, which will compete with traditional cars runninu on uasoline. It also needs the required infrastructure for electric vehicles, includinu a network of charuinu stations to overcome “ranue anxiety”7 by consumers; many mass-market electric vehicles cannot drive as far on one charue as uasoline-powered cars can with a full tank of uas. Gas stations can be found pretty much on any corner in cities and every couple of miles on hiuhways.8 A GUIDING POLICY. After the diaunosis of the competitive challenue, the firm needs to formulate an effective uuidinu policy in response. The formulated strateuy needs to be consistent, often backed up with strategic commitments such as sizable investments or chanues to an oruanization’s incentive and reward system—biu chanues that cannot be easily reversed. Without consistency in a firm’s uuidinu policy, employees become confused and cannot make effective day-to-day decisions that support the overall strateuy. Moreover, without consistency in strateuy, other stakeholders, includinu investors, also become frustrated. rot6128x_ch01_002-031.indd 7 11/22/19 7:10 PM 8 CHAPTER 1 What Is Strategy? To address the competitive challenge, Tesla’s current guiding policy is to build a costcompetitive mass-market vehicle such as the Model 3 (this is also Step 3 in Tesla’s “Secret Strategy,” as discussed in the ChapterCase). Tesla’s formulated strategy is consistent with its mission and the competitive challenge identified. It also requires significant strategic commitments, as demonstrated by Tesla’s $5 billion investment in a new lithium-ion battery plant in Nevada, the so-called Gigafactory. Batteries are the most critical component for electric vehicles, so to accomplish this major undertaking, Tesla partnered with Panasonic of Japan, a world leader in battery technology. To achieve its massive scale-up in Model 3 production, Tesla invested over $2 billion in a new manufacturing facility. In 2019, Tesla followed up with another multibillion investment by breaking ground for a factory in Shanghai, China. This factory is huge, combining the size of the Tesla car manufacturing facility in Fremont, California, with its Gigafactory in Nevada. The goal is to produce batteries and cars not only at large scale, but also in the same location. This will help lower the price of the Model 3 further to service the Chinese market, which is already the largest electric vehicle market globally by a wide margin. Although such large, up-front investments frequently lead to early-year losses, they also represent strong and credible commitments to becoming a viable competitor in the mass automobile market. COHERENT ACTIONS. A clear guiding policy needs to be implemented with a set of coherent actions. Tesla appears to implement its formulated strategy with actions consistent with its diagnosis of the competitive challenge. To accomplish building a cost-competitive massmarket vehicle, Tesla must benefit from economies of scale, which are decreases in cost per vehicle as output increases. To reap these critical cost reductions, Tesla must ramp up its production volume. This is a huge challenge: Tesla aims to increase its production output by some 20 times, from 50,000 cars built in 2015 to 1 million cars by 2020. Tesla’s retooling of its manufacturing facility in Fremont, California, to rely more heavily on cutting-edge robotics as well as its multibillion-dollar investment to secure an uninterrupted supply of lithiumion batteries exemplify actions coherent with Tesla’s formulated strategy. After production of the Model 3 began in mid-2017, major problems in operations limited the number of Model 3s produced to a mere 2,500 for the year. However, by the end of 2018, Tesla’s huge investments in both its highly automated car manufacturing facility and in its battery plant started to pay off—production of the Model 3 increased to 1,000 units a day. Thus, Tesla plans to produce more than 350,000 Model 3s (by end of 2019), a number it needs to achieve if it is to sustain its cash flow and meet pent-up product demand. At the same time, Tesla is expanding its network of charging stations across North America, Europe, and China. To fund this initiative and to avoid bottlenecks, it announced it will no longer provide new Tesla owners free use of the company’s charging network. To accomplish the lofty goal of making zero-emission electric motors the new standard in automotive technology rather than internal combustion engines, Tesla decided to make some of its proprietary technology available to the public. Musk’s hope is that sharing Tesla’s patents will expand the overall market size for electric vehicles as other manufacturers can employ Tesla’s technology. In review, to craft a good strategy, three steps are crucial in the strategic management process: First, a good strategy defines the competitive challenges facing an organization through a critical and honest assessment of the status quo. Second, a good strategy provides an overarching approach on how to deal with the competitive challenges identified. The approach needs to be communicated in policies that provide clear guidance for employees. Last, a good strategy requires effective implementation through a coherent set of actions. Strategy Highlight 1.1 takes a closer look at Twitter, and asks whether the social media news service has a strategy. rot6128x_ch01_002-031.indd 8 01/11/19 11:23 AM CHAPTER 1 9 What Is Strategy? Strategy Highlight 1.1 Does Twitter Have a Strategy? Twitter is not flying high! Shortly after its successful initial public offering in 2014, its market capitalization9 has fallen by 50 percent—from $40 billion to $20 billion in late 2018. Twitter’s user growth has stagnated, while core Tweeters are tweeting less and less. In 2015, co-founder Jack Dorsey returned as CEO but could not reverse Twitter’s decline. In comparison, during the same time period, Facebook’s market cap quadrupled from some $100 billion to $400 billion. The question thus arises: Does Twitter have a strategy? Launched in 2006, Twitter is an online news and social networking site that allows its Tweeters to send short messages (“tweets”) of up to 280 characters or less (and can include images or videos) to all followers. People who follow each other on Twitter can see each others’ status updates in their feeds. Users with the most followers include Katy Perry, American singer-songwriter and actress, with more than 107 million; Justin Bieber, Canadian singersongwriter, with 105 million; and former President Barack Obama with 104 million. While popular for its scannable content, Twitter’s social significance resulted from its pivotal role during the Arab Spring (2010–2012), in the Black Lives Matter movement (founded in 2013), and for its real-time coverage of such breaking news as the raid on Osama bin Laden’s compound in Pakistan (2011). Many of the most powerful politicians in the world such as President Donald Trump and India Prime Minister Narendra Modi use Twitter to communicate directly with the public, allowing them to bypass traditional media outlets. To answer the question of whether Twitter has a strategy, let’s apply the three critical elements of a good strategy and the three critical tasks of a good strategic management process: diagnose the competitive challenge, derive a guiding policy, and implement a coherent set of actions. THE COMPETITIVE CHALLENGE Twitter’s business model is to grow its user base and then charge advertisers for promoting goods and services to that user base. While individual users pay nothing, their tweets give Twitter free user-generated content to drive more traffic to its site. Companies pay for “promoted tweets” that are directly inserted Twitter is not flying high! Between 2014 and 2018, it lost $20 billion in market capitalization. x9626/Shutterstock into a user’s news stream. But compare Twitter’s 330 million monthly users to Facebook’s over 2 billion users—this tells us that Facebook’s user base is almost seven times the size of Twitter’s. Given its much smaller user base, advertisers view Twitter as a niche application and thus will direct the bulk of their digital ad dollars to larger sites such as Facebook, Google, and Amazon. Compared to Facebook, Twitter suffers in ways other than sheer scale. For instance, it has allowed competitors such as Snapchat, WhatsApp, and Instagram (all owned by Facebook) to move into the space it originally created. In addition, Facebook allows advertisers to target their online ads more precisely by using the demographic data Facebook collects, including birth year, university affiliation, network of friends, interests, and so forth. (This data collection has created a whole different set of problems for Facebook, which is discussed further in ChapterCase 2). Clearly, Twitter needs a larger user base to attract more online advertisers and better monetize its social media service. A GUIDING POLICY Here is where Twitter’s problems begin. While its leaders have accurately identified and diagnosed Twitter’s competitive challenge (to grow its user base), they still lack a clear guiding policy for how to address this challenge. One way would be to simplify the sign-up process. Another would be to better explain the sometimes idiosyncratic conventions of Twitter use to a broader audience. Yet another would be to root out offensive content, fake accounts, and misinformation, and to be more aggressive about blocking cyber trolls. Perhaps even more important, Twitter needs to find a way to take (Continued) rot6128x_ch01_002-031.indd 9 01/11/19 11:23 AM 10 CHAPTER 1 What Is Strategy? back the social media space that’s now being dominated by Snapchat, WhatsApp, and Instagram. COHERENT ACTIONS Changing the goalpost of which users (core, noncore, or passive viewers that see tweets on other media) to target not only confused management, but it also limited functional guidance for employees in day-to-day operations. Consequences of confusing directions for strategy implementation followed, including increased frustration among managers and engineers, which led to the turnover of key personnel. As Twitter attempts to be more attractive to different types of users, it encounters trade-offs that are hard if not impossible to reconcile. Consider the search or mobile functionality of an application, for example: The needs of core users are very different from that of casual visitors or passive viewers. Internal turmoil was further stoked by several management demotions as well as promotions of close personal friends of the CEO. From its inception, Twitter’s culture has been hampered by infighting and public intrigues among co-founders and other early leaders. To reduce the gap with Facebook’s enormous scale and global reach, Twitter has attempted to be everything to everybody, without considering the strategic tradeoffs. This has resulted in not only low employee morale, but also inferior performance. Declaring that Twitter’s “ambition is to have the largest audience in the world” 10 is not a good strategy; it is no strategy at all. Rather it is a mere statement of desire. With Twitter’s continuing decline in its market cap, it is likely to end up a takeover target.11 LO 1-2 WHAT IS COMPETITIVE ADVANTAGE? Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity. A firm that achieves superior performance relative to other competitors in the same industry or the industry average has a competitive advantage.12 Competitive advantage is always relative, not absolute. To assess competitive advantage, we compare firm performance to a benchmark—that is, either the performance of other firms in the same industry or an industry average. In terms of stock market valuation, Tesla has appreciated much more in recent years than GM, Ford, or Chrysler, and thus appears to have a competitive advantage, at least on this dimension. A firm that is able to outperform its competitors or the industry average over a prolonged period has a sustainable competitive advantage. Apple, for example, has enjoyed a sustainable competitive advantage over Samsung in the smartphone industry for over a decade since its introduction of the iPhone in 2007. Other phone makers such as Microsoft (which purchased Nokia) and BlackBerry have all but exited the smartphone market, while new entrants such as Huawei and Xiaomi of China are trying to gain traction. If a firm underperforms its rivals or the industry average, it has a competitive disadvantage. For example, a 15 percent return on invested capital may sound like superior firm performance. In the consulting industry, though, where the average return on invested capital is often above 20 percent, such a return puts a firm at a competitive disadvantage. In contrast, if a firm’s return on invested capital is 2 percent in a declining industry, like newspaper publishing, where the industry average has been negative (–5 percent) for the past few years, then the firm has a competitive advantage. Should two or more firms perform at the same level, they have competitive parity. In Chapter 5, we’ll discuss in greater depth how to evaluate and assess competitive advantage and firm performance. To gain a competitive advantage, a firm needs to provide either goods or services consumers value more highly than those of its competitors, or goods or services similar to the competitors’ at lower cost. The rewards of superior value creation and capture are profitability and market share. Elon Musk is particularly motivated to address competitive advantage Superior performance relative to other competitors in the same industry or the industry average. sustainable competitive advantage Outperforming competitors or the industry average over a prolonged period of time. competitive disadvantage Underperformance relative to other competitors in the same industry or the industry average. competitive parity Performance of two or more firms at the same level. rot6128x_ch01_002-031.indd 10 01/11/19 11:23 AM CHAPTER 1 global warming, and thus formed Tesla to build electric vehicles with zero emissions. Sara Blakely, the founder and CEO of Spanx, the global leader in the shapewear industry, is motivated to change women’s lives. Sam Walton was driven by offering acceptable value at lower cost than his competitors when creating Walmart, the world’s largest (brick-and-mortar) retailer. For Musk, Blakely, Walton, and numerous other entrepreneurs and businesspeople, creating shareholder value and making money is the consequence of filling a need and providing a product, service, or experience consumers wanted, at a price they could afford while still making a profit. The important point here is that strategy is about delivering superior value, while containing the cost to create it, or by offering similar value at lower cost. Managers achieve these combinations of value and cost through strategic positioning. That is, they stake out a unique position within an industry that allows the firm to provide value to customers, while controlling costs. The greater the difference between value creation and cost, the greater the firm’s economic contribution and the more likely it will gain competitive advantage. Strategic positioning requires trade-offs, however. As a low-cost retailer, Walmart has a clear strategic profile and serves a specific market segment. Upscale retailer Nordstrom has also built a clear strategic profile by providing superior customer service to a higher end, luxury market segment. Although these companies are in the same industry, their customer segments overlap very little, and they are not direct competitors. Walmart and Nordstrom have each chosen a distinct but different strategic position. The managers make conscious trade-offs that enable each company to strive for competitive advantage in the retail industry, using different competitive strategies: cost leadership versus differentiation. In regard to the customer service dimension, Walmart provides acceptable service by low-skill employees in a big-box retail outlet offering “everyday low prices,” while Nordstrom provides a superior customer experience by professional salespeople in a luxury setting. A clear strategic profile—in terms of product differentiation, cost, and customer service— allows each retailer to meet specific customer needs. Competition focuses on creating value for customers (through lower prices or better service and selection, in this example) rather than destroying rivals. Even though Walmart and Nordstrom compete in the same industry, both can win if they achieve a clear strategic position through a well-executed competitive strategy. Strategy, therefore, is not a zero-sum game. The key to successful strategy is to combine a set of activities to stake out a unique strategic position within an industry. Competitive advantage has to come from performing different activities or performing the same activities differently than rivals are doing. Ideally, these activities reinforce one another rather than create trade-offs. For instance, Walmart’s strategic activities strengthen its position as cost leader: Big retail stores in rural locations, extremely high purchasing power, sophisticated IT systems, regional distribution centers, low corporate overhead, and low base wages and salaries combined with employee profit sharing reinforce each other, to maintain the company’s cost leadership. Since clear strategic positioning requires trade-offs, strategy is as much about deciding what not to do, as it is about deciding what to do.13 Because resources are limited, managers rot6128x_ch01_002-031.indd 11 What Is Strategy? 11 Spanx founder and CEO Sara Blakely, a graduate of Florida State University and former salesperson of fax machines, was America’s richest selfmade woman in 2018, according to Forbes. Marla Aufmuth/Getty Images 01/11/19 11:23 AM 12 CHAPTER 1 What Is Strategy? must carefully consider their strategic choices in the quest for competitive advantage. Trying to be everything to everybody will likely result in inferior performance. As a striking example, the department store chain Sears was founded in 1886 and long hailed as an innovator. Sears pioneered its iconic mail-order catalog shortly after its founding, which allowed customers in rural and remote areas of the United States to shop like city dwellers (a similar service to what Amazon provides today, albeit relying on a much smaller selection and slower deliveries). Yet, as time progressed and Sears failed to adapt to new competitive challenges, it lost its competitive advantage. More recently, Sears did not have a clear strategic position but tried to be too many things for too many types of customers. As a consequence, after more than 130 years in business, Sears filed for bankruptcy in 2018. It is also important to note that operational effectiveness, marketing skills, and other functional expertise all strengthen a unique strategic position. Those capabilities, though, do not substitute for competitive strategy. Competing to be similar but just a bit better than your competitor is likely to be a recipe for cut-throat competition and low profit potential. Let’s take this idea to its extreme in a quick thought experiment: If all firms in the same industry pursued a low-cost position through application of competitive benchmarking, all firms would have identical cost structures. None could gain a competitive advantage. Everyone would be running faster, but nothing would change in terms of relative strategic positions. There would be little if any value creation for customers because companies would have no resources to invest in product and process improvements. Moreover, the least-efficient firms would be driven out, further reducing customer choice. To gain a deeper understanding of what strategy is, it may be helpful to think about what strategy is not.14 Be on the lookout for the following major hallmarks of what strategy is not: GRANDIOSE STATEMENTS ARE NOT STRATEGY. You may have heard firms say things like, “Our strategy is to win” or “We will be No. 1.” Twitter, for example, declared its “ambition is to have the largest audience in the world.”15 Such statements of desire, on their own, are not strategy. They provide little managerial guidance and often lead to goal conflict and confusion. Moreover, such wishful thinking frequently fails to address economic fundamentals. As we will discuss in the next section, an effective vision and mission can lay the foundation upon which to craft a good strategy. This foundation must be backed up, however, by strategic actions that allow the firm to address a competitive challenge with clear consideration of economic fundamentals, in particular, value creation and costs. A FAILURE TO FACE A COMPETITIVE CHALLENGE IS NOT STRATEGY. If a firm does not define a clear competitive challenge, employees have no way of assessing whether they are making progress in addressing it. Strategic leaders at the now-defunct video rental chain Blockbuster, for example, failed to address the competitive challenges posed by new players Netflix, Redbox, Amazon Prime, and Hulu. OPERATIONAL EFFECTIVENESS, COMPETITIVE BENCHMARKING, OR OTHER TACTICAL TOOLS ARE NOT STRATEGY. People casually refer to a host of different policies and initiatives as some sort of strategy: pricing strategy, internet strategy, alliance strategy, operations strategy, IT strategy, brand strategy, marketing strategy, HR strategy, China strategy, and so on. All these elements may be a necessary part of a firm’s functional and global initiatives to support its competitive strategy, but these elements are not sufficient to achieve competitive advantage. In this text, we will reserve the term strategy for describing the firm’s overall efforts to gain and sustain competitive advantage. rot6128x_ch01_002-031.indd 12 01/11/19 11:23 AM CHAPTER 1 1.2 Stakeholder Strategy and Competitive Advantage VALUE CREATION Companies with a good strategy generate value for society. When firms compete in their own self-interest while obeying the law and acting ethically, they ultimately create value. Value creation occurs because companies with a good strategy are able to provide products or services to consumers at a price point that they can afford while keeping their costs in check, thus making a profit at the same time. Both parties benefit from this trade as each captures a part of the value created. In so doing, they leave society better off.16 Value creation in turn lays the foundation for the benefits that successful economies can provide: education, infrastructure, public safety, health care, clean water and air, among others. Superior performance allows a firm to reinvest some of its profits and to grow, which in turn provides more opportunities for employment and fulfilling careers. Although Google (a division of Alphabet) started as a research project in graduate school by Larry Page and Sergey Brin in the late 1990s, some 20 years later it had become one of the most valuable companies in the world with over $800 billion in market capitalization and 100,000 employees, not to mention the billions of people across the world who rely on it for information gathering and decision making, which is free for the end user.17 Strategic failure, in contrast, can be expensive. Once a leading technology company, Hewlett-Packard was known for innovation, resulting in superior products. The “HP way of management” included lifetime employment, generous benefits, work/life balance, and freedom to explore ideas, among other perks.18 However, HP has not been able to address the competitive challenges of mobile computing or business IT services effectively. As a result, HP’s stakeholders suffered. Shareholder value was destroyed. The company also had to lay off tens of thousands of employees. Its customers no longer received the innovative products and services that made HP famous. The contrasting examples of Alphabet and HP illustrate the relationship between individual firms, competitive advantage, and society at large. Successful firms ultimately create value for society. In the first decade of the new millennium, this relationship received more critical scrutiny due to major shocks to free market capitalism.19 In particular, the implicit trust relationship between the corporate world and society at large has deteriorated because of several notable crises. One of the first crises of the 21st century occurred when the accounting scandals at Enron, Arthur Andersen, WorldCom, Tyco, Adelphia, and others, came to light. Those events led to bankruptcies, large-scale job loss, and the destruction of billions of dollars in shareholder value. As a result, the public’s trust in business and free market capitalism began to erode. Another major event occurred in the fall of 2008 with the global financial crisis, which shook the entire free market system to its core.20 A real estate bubble had developed in the United States, fueled by cheap credit and the availability of subprime mortgages. When that bubble burst, many entities faced financial duress or bankruptcy—those who had unsustainable mortgages, investors holding securities based on those mortgages, and the financial institutions that had sold the securities. Some went under, and others were sold at fire-sale prices. Home foreclosures skyrocketed as a large number of borrowers defaulted on their mortgages. House prices in the United States plummeted by roughly 30 percent. The United States plunged into a deep recession. In the process, the Dow Jones Industrial Average (DJIA) lost about half its market value. rot6128x_ch01_002-031.indd 13 What Is Strategy? 13 LO 1-3 Assess the relationship between stakeholder strategy and sustainable competitive advantage. value creation Occurs when companies with a good strategy are able to provide products or services to consumers at a price point that they can afford while keeping their costs in check, thus making a profit at the same time. Both parties benefit from this trade as each captures a part of the value created. 01/11/19 11:23 AM 14 CHAPTER 1 What Is Strategy? stakeholders Organizations, groups, and individuals that can affect or are affected by a firm’s actions. The impact was worldwide. The freezing of capital markets during the global financial crisis triggered a debt crisis in Europe. Some European governments (notably Greece) defaulted on government debt; other countries were able to repay their debts only through the assistance of other, more solvent European countries. This severe financial crisis not only put Europe’s common currency, the euro, at risk, but also led to a prolonged and deep recession in Europe. Disenchanted with the European Union, the United Kingdom voted in 2016 to leave the alliance in wake of the Brexit movement (short for British exit). In the United States, the Occupy Wall Street protest movement was born out of dissatisfaction with the capitalist system. Issues of income disparity, corporate ethics, corporate influence on governments, and ecological sustainability were key drivers. Although these major events in the business world differed in their specifics, two common features are pertinent to our study of strategic management.21 First, these events demonstrate that managerial actions can affect the economic well-being of large numbers of people around the globe. Most of the events resulted from executive actions within a few organizations, or compounded across a specific industry or government. The second pertinent feature relates to stakeholders—organizations, groups, and individuals that can affect or be affected by a firm’s actions.22 This leads us to stakeholde...
Purchase answer to see full attachment