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Part I: Concepts and Techniques for Crafting and Executing Strategy
Section A: Introduction and Overview
What Is Strategy and Why Does It Matter?
The Managerial Process of Crafting and Executing Company Strategies
Chapter 1
Chapter 2
Section B: Concepts and Analytical Tools
Concepts and Analytical Tools for Evaluating a Company’s Situation
Section C: Crafting a Strategy
Tailoring Strategy to Various Company Situations
Chapters 3 and 4
Should Company Strategies Be Ethical and/or Socially Responsible?
Chapter 9
SingleBusiness Companies
Multi-Business or Diversified Companies
Chapters 5, 6, and 7
Chapter 8
Section D: Executing the Strategy
Managerial Keys to Successfully Executing the Chosen Strategy
Chapters 10, 11, and 12
Part II: Readings in Crafting and Executing Strategy Section A: What Is Strategy and How Is the Process of Crafting and Executing Strategy Managed? (2 readings) Section B: Crafting Strategy in Single-Business Companies (11 readings) Section C: Crafting Strategy in Diversified Companies (1 reading) Section D: Strategy, Ethics, and Social Responsibility (2 readings) Section E: Executing Strategy (4 readings)
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Arthur A. Thompson, Jr. The University of Alabama
A. J. Strickland III The University of Alabama
John E. Gamble University of South Alabama
Crafting and Executing Strategy Text and Readings 17TH E DITION
Boston Burr Ridge, IL Dubuque, IA New York San Francisco St. Louis Bangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto
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CRAFTING AND EXECUTING STRATEGY: TEXT AND READINGS Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2010, 2007, 2005, 2003, 2001, 1999, 1998, 1996, 1995, 1993, 1992, 1990, 1987, 1984, 1981, 1978 by The McGraw-Hill Companies, Inc. All rights reserved. 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 The McGraw-Hill Companies, Inc., 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 0 WCK/WCK 0 9 ISBN 978-0-07-724769-0 MHID 0-07-724769-8 Vice president and editor-in-chief: Brent Gordon Senior sponsoring editor: Michael Ablassmeir Developmental editor II: Laura Griffin Editorial coordinator: Kelly Pekelder Senior marketing manager: Anke Braun Weekes Marketing coordinator: Michael Gedatus Senior project manager: Harvey Yep Lead production supervisor: Michael R. McCormick Design coordinator: Cara Hawthorne Senior photo research coordinator: Lori Kramer Senior media project manager : Susan Lombardi Cover design: Jillian Lindner Interior design: Jillian Lindner Typeface: 10.5/12 Times New Roman Compositor: Laserwords Private Limited Printer: Quebecor World Versailles Inc. Photo Credits: Chapter 1, p. 4, © Images.com/Corbis, Bek Shakirov; Chapter 2, p. 22, © Images.com/ Corbis, Robert Rogers; Chapter 3, p. 54, © Images.com/Corbis, Lael Henderson; Chapter 4, p. 100, © Images.com/Corbis; Chapter 5, p. 138, © Images.com/Corbis, Bruno Budrovic; Chapter 6, p. 164, © Images.com/Corbis; Chapter 7, p. 206, © Images.com/Corbis; Chapter 8, p. 238, © Images.com/ Corbis, Christopher Zacharow; Chapter 9, p. 288, © Images.com/Corbis, Sheila Golden; Chapter 10, p. 326, © Images.com/Corbis, Rob Colvin; Chapter 11, p. 356, Images.com/Corbis, David C. Chen; Chapter 12, p. 384, © Images.com/Corbis, Paul Anderson. Library of Congress Cataloging-in-Publication Data Thompson, Arthur A., 1940Crafting and executing strategy : text and reading / Arthur A. Thompson, Jr., A.J. Strickland III, John E. Gamble.—17th ed. p. cm. Includes index. ISBN-13: 978-0-07-724769-0 (alk. paper) ISBN-10: 0-07-724769-8 (alk. paper) 1. Strategic planning. 2. Business planning. I. Stickland, A.J. (Alonzo J.) II. Gamble, John (John E.) III. Title. HD30.28.T525 2010 658.4'012–dc22
www.mhhe.com
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To our families and especially our wives: Hasseline, Kitty, and Debra
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About the Authors rthur A. Thompson, Jr., earned his B.S. and Ph.D. degrees in economics from The University of Tennessee, spent three years on the economics faculty at Virginia Tech, and served on the faculty of The University of Alabama’s College of Commerce and Business Administration for 24 years. In 1974 and again in 1982, Dr. Thompson spent semester-long sabbaticals as a visiting scholar at the Harvard Business School. His areas of specialization are business strategy, competition and market analysis, and the economics of business enterprises. In addition to publishing over 30 articles in some 25 different professional and trade publications, he has authored or co-authored five textbooks and six computer-based simulation exercises that are used in colleges and universities worldwide. Dr. Thompson spends much of his off-campus time giving presentations, putting on management development programs, working with companies, and helping operate a business simulation enterprise in which he is a major partner. Dr. Thompson and his wife of 47 years have two daughters, two grandchildren, and a Yorkshire terrier.
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r. A. J. (Lonnie) Strickland, a native of North Georgia, attended the University of Georgia, where he received a bachelor of science degree in math and physics in 1965. Afterward he entered the Georgia Institute of Technology, where he received a master of science in industrial management. He earned a Ph.D. in business administration from Georgia State University in 1969. He currently holds the title of Professor of Strategic Management in the Graduate School of Business at The University of Alabama. Dr. Strickland’s experience in consulting and executive development is in the strategic management area, with a concentration in industry and competitive analysis. He has developed strategic planning systems for such firms as The Southern Company, BellSouth, South Central Bell, American Telephone and Telegraph, Gulf States Paper, Carraway Methodist Medical Center, Delco Remy, Mark IV Industries, Amoco Oil Company, USA Group, General Motors, and Kimberly Clark Corporation (Medical Products). He is a very popular speaker on the subject of implementing strategic change and serves on several corporate boards.
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ohn E. Gamble is currently Associate Dean and Professor of Management in the Mitchell College of Business at the University of South Alabama. His teaching specialty at USA is strategic management and he also conducts a course in strategic management in Germany, which is sponsored by the University of Applied Sciences in Worms. Dr. Gamble’s research interests center on strategic issues in entrepreneurial, health care, and manufacturing settings. His work has been published in various scholarly journals and he is the author or co-author of more than 30 case studies published in an assortment of strategic management and strategic marketing texts. He has done consulting on industry and market analysis for clients in a diverse mix of industries. Professor Gamble received his Ph.D. in management from The University of Alabama in 1995. Dr. Gamble also has a Bachelor of Science degree and a Master of Arts degree from The University of Alabama.
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he objective of this text is to effectively and interestingly cover what every seniorlevel or MBA student needs to know about crafting and executing business strategies. It features a substantive presentation of core concepts and analytical techniques and an attractive collection of 20 readings that amplify important topics in managing a company’s strategy-making, strategy-executing process. A combination chapters–readings text works quite well for courses where instructors wish to provide students with a foundation in the core concepts and analytical tools of strategic management and a taste of the literature of strategic management before having them tackle a customized set of cases and/or participate in a strategy simulation exercise where the class is divided into teams of 2 to 5 members and each team manages a company that competes head-to-head against companies run by the other teams. Two bestselling state-of-the-art online strategy simulations, The Business Strategy Game and GLO-BUS, are optional companions for this text—both simulations were created by this text’s senior author as a means for instructors to give students an engaging, learnby-doing experience in crafting and executing a strategy and applying the concepts and analytical tools covered in the chapters. In preparing this 17th edition, our central goals have been to refine the explanations of core concepts and analytical tools, to update and refresh all of the examples, and to incorporate the latest research findings from the literature. As in any substantive revision, coverage was trimmed in some areas, expanded in others. The content of two chapters in the prior edition was condensed into a single chapter in this edition. A new section on strategic leadership has been added to Chapter 2. There is important new coverage of corporate and environmental sustainability. At the end of each chapter, you will now find (1) “Assurance of Learning Exercises” that will help you measure student comprehension of the chapter contents and (2) “Exercises for Simulation Participants” that tightly connect the topics covered in the chapters to the issues and decisions that students have to wrestle with in managing their simulation company. Complementing the 12 chapters and 20 readings is a comprehensive package of support materials that are a breeze to use, highly effective, and flexible enough to fit most any course design.
ON-TARGET CONTENT: THE HALLMARK OF THE 17TH EDITION CHAPTERS In our view, for a senior/MBA-level strategy text to qualify as having on-target content, it must:
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Explain core concepts in language that students can grasp and provide first-rate examples of their relevance and use by actual companies. Thoroughly describe the tools of strategic analysis, how they are used, and where they fit into the managerial process of crafting and executing strategy.
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Incorporate the latest developments in the theory and practice of strategic management in every chapter to keep the content solidly in the mainstream of contemporary strategic thinking. Focus squarely on what every student needs to know about crafting, implementing, and executing business strategies in today’s market environments.
We believe this 17th edition measures up on all four criteria. The explanations of core concepts and analytical tools are thorough and carefully crafted to maximize understanding—the enterprise of sound teaching is never well served by page-saving succinctness that leaves too much unsaid. Chapter content is driven by the imperative of covering well-settled strategic management principles, recent research findings and contributions to the literature of strategic management, the latest thinking of prominent academics and practitioners in the field, and the practices and behavior of real world companies. There is solid, up-to-date coverage of the continuing march of industries and companies to wider globalization, the growing scope and strategic importance of collaborative alliances, the spread of high-velocity change to more industries and company environments, and how advancing Internet technology is driving fundamental changes in both strategy and internal operations in companies across the world. All the chapters are flush with convincing examples that students can relate to. There’s a logical flow from one chapter to the next. And we have strived to hammer home the whys and hows of successfully crafting and executing strategy in an engaging and convincing fashion. The result is a presentation with mainstream chapter content that mirrors contemporary academic thinking and actual management practice. But there are two standout features that strongly differentiate our 12-chapter presentation: 1. Our coverage of resource-based theory of the firm in the 17th edition is unsurpassed by any other leading strategy text. RBV principles and concepts are prominently and comprehensively integrated into our coverage of crafting both single-business and multi-business strategies. In Chapters 3 through 8 it is repeatedly emphasized that a company’s strategy must be matched not only to its external market circumstances but also to its internal resources and competitive capabilities. Moreover, an RBV perspective is thoroughly integrated into the presentation on strategy execution (Chapters 10, 11, and 12) to make it unequivocally clear how and why the tasks of assembling intellectual capital and building core competencies and competitive capabilities are absolutely critical to successful strategy execution and operating excellence. 2. In addition, our coverage of business ethics, core values, social responsibility, and environmental sustainability is unsurpassed by any other leading strategy text. In this edition, we have embellished the highly important chapter on “Ethical Strategies, Social Responsibility, and Environmental Sustainability” with fresh content so that it can better fulfill the important functions of (1) alerting students to the role and importance of ethical and socially responsible decision-making and (2) addressing the accreditation requirements of the AACSB International that business ethics be visibly and thoroughly embedded in the core curriculum. Moreover, discussions of the roles of values and ethics are integrated into portions of Chapters 1, 2, 10, and 12 to further reinforce why and how considerations relating to ethics, values, social responsibility, and sustainability should figure prominently into the managerial task of crafting and executing company strategies.
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ORGANIZATION, CONTENT, AND FEATURES OF THE 17TH EDITION TEXT CHAPTERS The following rundown summarizes the noteworthy features and topical emphasis in the 12 chapters comprising this edition:
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Chapter 1 is focused directly on “what is strategy and why is it important?” There are substantive discussions of what is meant by the term strategy, the different elements of a company’s strategy, and why management efforts to craft a company’s strategy tend to be squarely aimed at building sustainable competitive advantage. Considerable emphasis is given to how and why a company’s strategy is partly planned and partly reactive and why a company’s strategy tends to evolve over time. There’s an important section discussing what is meant by the term business model and how it relates to the concept of strategy. The thrust of this first chapter is to convince students that good strategy 0001 good strategy execution 0002 good management. The chapter is a perfect accompaniment for your opening day lecture on what the course is all about and why it matters. Chapter 2 concerns the managerial process of actually crafting and executing a strategy—it makes a great assignment for the second day of class and is a perfect follow-on to your first day’s lecture. The focal point of the chapter is the five-step managerial process of crafting and executing strategy: (1) forming a strategic vision of where the company is headed and why, (2) the managerial importance of developing a balanced scorecard of objectives and performance targets that measure the company’s progress, (3) crafting a strategy to achieve these targets and move the company toward its market destination, (4) implementing and executing the strategy, and (5) monitoring progress and making corrective adjustments as needed. Students are introduced to such core concepts as strategic visions, mission statements, strategic versus financial objectives, and strategic intent. An all-new section underscores that this 5-step process requires strong strategic leadership. There’s a robust discussion of why all managers are on a company’s strategy-making, strategy-executing team and why a company’s strategic plan is a collection of strategies devised by different managers at different levels in the organizational hierarchy. The chapter winds up with a concise but meaty section on corporate governance. Chapter 3 sets forth the now-familiar analytical tools and concepts of industry and competitive analysis and demonstrates the importance of tailoring strategy to fit the circumstances of a company’s industry and competitive environment. The standout feature of this chapter is a presentation of Michael Porter’s “five forces model of competition” that we think is the clearest, most straightforward discussion of any text in the field. Globalization and Internet technology are treated as potent driving forces capable of reshaping industry competition—their roles as change agents have become factors that most companies in most industries must reckon with in forging winning strategies. Chapter 4 presents the resource-based view of the firm and convincingly argues why a company’s strategy must be built around its resources, competencies, and competitive capabilities. The roles of core competencies and organizational resources and capabilities in creating customer value are center stage in the discussions of company resource strengths and weaknesses. SWOT analysis is cast as a simple, easy-to-use way to assess a company’s resources and overall situation.
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There is solid coverage of value chain analysis, benchmarking, and competitive strength assessments—standard tools for appraising a company’s relative cost position and market standing vis-à-vis rivals. An important feature of this chapter is a table showing how key financial and operating ratios are calculated and how to interpret them; students will find this table handy in doing the number-crunching needed to evaluate whether a company’s strategy is delivering good financial performance. Chapter 5 deals with a company’s quest for competitive advantage and is framed around the five generic competitive strategies—low-cost leadership, differentiation, best-cost provider, focused differentiation, and focused low-cost. A much revamped Chapter 6 extends the coverage of the previous chapter and deals with what other strategic actions a company can take to complement its choice of a basic competitive strategy and to employ a strategy that is wisely matched to both industry and competitive conditions and to company resources and capabilities. The chapter features sections on what use to make of strategic alliances and collaborative partnerships; merger and acquisition strategies; vertical integration strategies; outsourcing strategies; and the broad strategy options for companies competing in six representative industry and competitive situations: (1) emerging industries, (2) rapid growth industries; (3) mature, slow-growth industries, (4) stagnant or declining industries, (5) turbulent, high velocity industries, and (6) fragmented industries. The concluding section of this chapter covers first-mover advantages and disadvantages, including the first-mover benefits of pursuing a blue ocean strategy. Chapter 7 explores the full range of strategy options for competing in foreign markets: export strategies, licensing, franchising, multicountry strategies, global strategies, and collaborative strategies involving heavy reliance on strategic alliances and joint ventures. The spotlight is trained on two strategic issues unique to competing multinationally: (1) whether to customize the company’s offerings in each different country market to better match the tastes and preferences of local buyers or whether to offer a mostly standardized product worldwide and (2) whether to employ essentially the same basic competitive strategy in the markets of all countries where it operates or whether to modify the company’s competitive approach country-by-country as may be needed to fit the specific market conditions and competitive circumstances it encounters. There’s also coverage of the special issues of competing in the markets of emerging countries and the strategies that local companies in emerging countries can use to defend against global giants. Our rather meaty treatment of diversification strategies for multibusiness enterprises in Chapter 8 begins by laying out the various paths for becoming diversified, explains how a company can use diversification to create or compound competitive advantage for its business units, and examines the strategic options an already-diversified company has to improve its overall performance. In the middle part of the chapter, the analytical spotlight is on the techniques and procedures for assessing the strategic attractiveness of a diversified company’s business portfolio—the relative attractiveness of the various businesses the company has diversified into, a multi-industry company’s competitive strength in each of its lines of business, and the strategic fits and resource fits among a diversified company’s different businesses. The chapter concludes with a brief survey of a company’s four main post-diversification strategy alternatives: (1) broadening the
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diversification base, (2) divesting some businesses and retrenching to a narrower diversification base, (3) restructuring the makeup of the company’s business lineup, and (4) multinational diversification. Chapter 9 provides comprehensive coverage of some increasingly pertinent frontburner strategic issues: (1) whether and why a company has a duty to operate according to ethical standards and (2) whether and why a company has a duty or obligation to contribute to the betterment of society independent of the needs and preferences of the customers it serves. Is there a credible business case for operating ethically and/or operating in a socially responsible manner? Why should a company’s strategy measure up to the standards of being environmentally sustainable? The opening section of the chapter addresses whether ethical standards are universal (as maintained by the school of ethical universalism) or dependent on local norms and situational circumstances (as maintained by the school of ethical relativism) or a combination of both (as maintained by integrative social contracts theory). Following this are sections on the three categories of managerial morality (moral, immoral, and amoral), the drivers of unethical strategies and shady business behavior, the approaches to managing a company’s ethical conduct, the concept of a “social responsibility strategy”, the moral and business cases for both ethical strategies and socially responsible behavior, the concept of environmental sustainability, and why every company’s strategy should be crafted in an manner that promotes environmental sustainability. The contents of this chapter will definitely give students some things to ponder and, hopefully, will make them far more ethically aware and conscious of why all companies should conduct their business in a socially responsible and sustainable manner. Chapter 9 has been written as a “stand-alone” chapter that can be assigned in the early, middle, or late part of the course. The three-chapter module on executing strategy (Chapters 10-12) is anchored around a pragmatic, compelling conceptual framework: (1) building the resource strengths and organizational capabilities needed to execute the strategy in competent fashion; (2) allocating ample resources to strategy-critical activities; (3) ensuring that policies and procedures facilitate rather than impede strategy execution; (4) instituting best practices and pushing for continuous improvement in how value chain activities are performed; (5) installing information and operating systems that enable company personnel to better carry out their strategic roles proficiently; (6) tying rewards and incentives directly to the achievement of performance targets and good strategy execution; (7) shaping the work environment and corporate culture to fit the strategy; and (8) exerting the internal leadership needed to drive execution forward. The recurring theme throughout these three chapters is that implementing and executing strategy entails figuring out the specific actions, behaviors, and conditions that are needed for a smooth strategy-supportive operation and then following through to get things done and deliver results—the goal here is to ensure that students understand the strategy-implementing/strategy-executing phase is a make-things-happen and make-them-happen-right kind of managerial exercise that leads to operating excellence and good performance.
We have done our best to ensure that the 12 chapters hit the bull’s-eye in covering the concepts, analytical tools, and approaches to strategic thinking that should comprise a senior/MBA course in strategy. The ultimate test of the text, of course, is the
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positive pedagogical impact it has in the classroom. If this edition sets a more effective stage for your lectures and does a better job of helping you persuade students that the discipline of strategy merits their rapt attention, then it will have fulfilled its purpose.
THE COLLECTION OF READINGS In selecting a set of readings to accompany the chapter presentations, we opted for articles that (1) had been recently published (most appeared in the 2006–2008 period), (2) extended the chapter coverage and expanded on a topic of strategic importance, and (3) were both quite readable and relatively short. At the same time, we endeavored to be highly selective, deciding that a manageable number of on-target readings was a better fit with the teaching/learning objectives of most senior and MBA courses in strategy than a more sweeping collection of readings. The 20 readings we chose came from recent issues of the Business Strategy Review, Strategy & Leadership, Harvard Business Review, MIT Sloan Management Review, Business Ethics Quarterly, Journal of Business Strategy, European Management Journal, Ivey Business Journal, and The TQM Magazine. Aside from providing an introductory look at the literature of strategic management literature, the readings offer nice variety. The first reading by Collis and Rukstad on “Can You Say What Your Strategy Is?” discusses the challenges of coming up with an accurate, straight-to-the-point strategy statement. The Ready and Conger article on “Enabling Bold Visions” sets forth a framework for ensuring that strategic visions take root and end up being put into practice, rather than being reduced to empty words or failed hopes. These two articles tie tightly to the material in Chapters 1 and 2. There are eight readings that complement and expand on topics covered in Chapters 3 through 6. The article by Holger Schiele on “Location, Location: The Geography of Industry Clusters,” explores why rival companies and their suppliers sometimes cluster in particular locations and geographic regions and powerful benefits which can flow from clustering; we recommend assigning it in conjunction with Chapter 3. The article by Bowman and Ambrosini on “Identifying Valuable Resources” is a mustassign reading because it adds power to the role and importance of the resource-based view of the firm that dominates the presentation in Chapter 4 (and that is integral to other chapters as well); the article tackles the question of “what is a valuable resource,” the ways of valuing a resource, and the means of exploiting a valuable resource. Reading 5 on “The Battle of the Value Chains” also complements the material in Chapter 4 and will give students additional insight into why the value chain concept is such a critically important analytical tool. George stalk’s article on “Playing Hardball” is must reading and will open eyes about how companies play competitive hardball in the marketplace. Reading 7 on “Hitting Back: Strategic Responses to Low-Cost Rivals” is a nice complement to the topics covered in Chapter 5 (and also Chapter 6). The article on “Limited Potential Niche or Prospective Market Foothold: Five Tests” also should be assigned in conjunction with Chapter 5. The piece by Kim and Mauborgne on “Value Innovation: A Leap into the Blue Ocean” deepens the coverage of blue ocean strategy in Chapter 6. The Markides and Geroski article on “Racing to Be Second: Conquering the Industries of the Future” provides excellent insight into first-mover disadvantages and fast follower advantages (topics covered in Chapter 6). We chose three articles to complement and expand on the topics of globalization and global strategy covered in Chapter 7. Pankaj Ghemawat’s article on “Globalization Is an Option Not an Imperative or, Why the World Is Not Flat” is definitely a must-assign
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article; it contains a persuasive presentation on the important differences that often exist between and among country markets and thus why multicountry strategies sometimes must be employed rather than global strategies. The timely reading on “The Challenge for Multinational Corporations in China: Think Local, Act Global” makes a case for why the often sage strategic advice of “think global, act local” needs to be reversed in the case of China. Reading 13 on “How to Win in Emerging Markets” adds breadth and depth to the discussion of the same topic in Chapter 7. We included one reading to be assigned in conjunction with Chapter 8 on diversification strategies. It is titled “Why Is Synergy So Difficult in Mergers of Related Businesses?” It is a perfect fit with the content of this chapter. There are two readings that tie very tightly to the Chapter 9 coverage of ethical business strategies, social responsibility, and environmental sustainability. Reading 15 by Bansal and Kandola explores in some detail the very pertinent issue of why good people sometimes behave badly in organizations; this topic is definitely worth exploring at some length in a wide open class discussion. A second reading deals with how differing competitive conditions affect a company’s use of commitment to social responsibility; the central thesis (which is somewhat provocative) is that depending on whether competition is weak or fierce, different acts and strategies become morally acceptable as well as economically rational. The authors argue that a firm has to develop its social responsibility strategy in light of its competitive position, as well as ethical considerations. Four readings were chosen for use with the three chapters on executing strategy (Chapters 10–12). The Neilson, Martin, and Powers article “The Secrets to Successful Strategy Execution” from the Harvard Business Review is a splendid treatise on how to avoid breakdowns in strategy execution; it fits in nicely with the framework we use in Chapter 10–12 to introduce students to the managerial tasks of implementing and executing the chosen strategy. Reading 18 on “Some Pros and Cons of Six Sigma” is a good fit with the material in Chapter 11. The Edwin Locke reading on “Linking Goals to Monetary Incentives” reinforces and expands the discussion in the last section of Chapter 11 on how to use incentives to further the cause of good strategy execution. This group of readings concludes with a very provocative article by Sidney Finkelstein on “The Seven Habits of Spectacularly Unsuccessful Executives.”
TWO ACCOMPANYING ONLINE, FULLY AUTOMATED SIMULATION EXERCISES— THE BUSINESS STRATEGY GAME AND GLO-BUS The Business Strategy Game and GLO-BUS: Developing Winning Competitive Strategies—two competition-based strategy simulations that are delivered online and that feature automated processing of decisions and grading of performance—are being marketed by the publisher as companion supplements for use with this and other texts in the field. The Business Strategy Game is the world’s leading strategy simulation, having been played by over 500,000 students at more than 600 universities across the world. GLO-BUS, a somewhat simpler online simulation introduced in 2004, has been used at more than 150 universities across the world in courses involving over 50,000 students.
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The two simulations are very tightly linked to the material that your class members will be reading about in the text chapters—the senior author of this text is a co-author of both The Business Strategy Game and GLO-BUS. Moreover, both simulations were painstakingly developed with an eye toward economizing on instructor course preparation time and grading. You’ll be pleasantly surprised—and we think quite pleased—at how little time it takes to gear up for and to administer a fully automated online simulation like The Business Strategy Game or GLO-BUS. In both The Business Strategy Game (BSG) and GLO-BUS, class members are divided into management teams of 1 to 5 persons and assigned to run a company in head-to-head competition against companies run by other class members. In BSG, the co-managers of each team run an athletic footwear company, producing and marketing both branded and private-label footwear. In GLO-BUS, the co-managers of each team operate a digital camera company that designs, assembles, and markets entry-level digital cameras and upscale, multi-featured cameras. In both simulations, companies compete in a global market arena, selling their products in four geographic regions— Europe-Africa, North America, Asia-Pacific, and Latin America. There are decisions relating to plant operations, workforce compensation, pricing and marketing, finance, and corporate social responsibility. You can schedule 1 or 2 practice rounds and 4 to 10 regular (scored) decision rounds; each decision round represents a year of company operations. When the instructor-specified deadline for a decision round arrives, the algorithms built into the simulation award sales and market shares to the competing companies, region by region. Each company’s sales are totally governed by how its prices compare against the prices of rival brands, how its product quality compares against the quality of rival brands, how its product line breadth and selection compares, how its advertising effort compares, and so on for a total of 11 competitive factors that determine unit sales and market shares. The competitiveness of each company’s product offering relative to rivals is all-decisive—this is what makes them “competition-based” strategy simulations. Once sales and market shares are awarded, the company and industry reports are then generated and all the results made available 15–20 minutes after the decision deadline. Both simulations feature a Learning Assurance Report that rates your students’ performance on facets of learning included in accreditation standards for most business school programs. Also, at the end of each of the 12 chapters in the text is a section containing exercises for simulation participants that require students to utilize what they have read in the chapter in running their simulation company.
The Compelling Case for Incorporating Use of a Strategy Simulation There are exceptionally important benefits associated with using a competition-based simulation in strategy courses taken by seniors and MBA students:
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Assigning students to run a company that competes head-to-head against companies run by other class members gives students immediate opportunity to experiment with various strategy options and to gain proficiency in applying the core concepts and analytical tools that they have been reading about in the chapters. The issues and decisions that co-managers face in running their simulation company embrace the very concepts, analytical tools, and strategy options they encounter in the text chapters. Giving class members immediate “learn-by-doing”
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opportunity to apply and experiment with the material covered in their text, while at the same time honing their business and decision-making skills, generates solid learning results. A competition-based strategy simulation arouses positive energy and classroom excitement, engages students in the subject matter of the course, is a fun way for students to learn, and steps up the whole tempo of the course by a notch or two—all of which greatly facilitate the achievement of course learning objectives. The healthy rivalry that emerges among the management teams of competing companies can be counted upon to stir competitive juices and spur class members to fully exercise their strategic wits, analytical skills, and decision-making prowess. Nothing energizes a class quicker or better than concerted efforts on the part of class members to gain a high industry ranking and avoid the perilous consequences of falling too far behind the best-performing companies. Case analysis assignments lack the capacity to generate the interest and excitement that occur when the results of the latest decision round become available and co-managers renew their quest for strategic moves and actions that will strengthen company performance. As soon as your students start to say “Wow! Not only is this fun but I am learning a lot,” which they will, you have won the battle of engaging students in the subject matter and moved the value of taking your course to a much higher plateau in the business school curriculum. This translates into a livelier, richer learning experience for students and better instructor-course evaluations. Because a simulation involves making decisions relating to production operations, worker compensation and training, sales and marketing, distribution, customer service, finance, and corporate social responsibility and requires analysis of company financial statements and market data, the simulation helps students synthesize the knowledge gained in a variety of different business courses. The cross-functional, integrative nature of a strategy simulation helps make courses in strategy more of a true capstone experience. Using both case analysis and a competition-based strategy simulation to drive home the lessons that class members are expected to learn is far more pedagogically powerful and lasting than case analysis alone. Both cases and strategy simulations drill students in thinking strategically and applying what they read in your text, thus helping them connect theory with practice and gradually building better business judgment. What cases do that a simulation cannot is give class members broad exposure to a variety of companies and industry situations and insight into the kinds of strategy-related problems managers face. But what a competitionbased strategy simulation does far better than case analysis is thrust class members squarely into an active managerial role where they have to take the analysis of market conditions, the actions of competitors, and their company’s situation seriously. Because they are held fully accountable for their decisions and their company’s performance, co-managers are strongly motivated to dig deeply into company operations, probe for ways to be more cost-efficient, and ferret out strategic moves and decisions calculated to boost company performance. Such diligent and purposeful actions on the part of company co-managers translate into a productive and beneficial learning experience. Use of a fully automated online simulation can reduce the time instructors spend on course preparation and grading papers. Simulation adopters often compensate for the added student workload of a simulation by trimming the number of assigned cases from, say, 10 to 12 to perhaps 4 to 6, which significantly reduces
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the time instructors have to spend on case preparation. Course preparation time can be further cut because you can use several class days to have students meet in the computer lab to work on upcoming decisions or a 3-year strategic plan (in lieu of lecturing on a chapter or covering an additional assigned case). Lab sessions provide a splendid opportunity for you to visit with teams, observe the interplay among co-managers, and view the caliber of the learning experience that is going on. Furthermore, the added student workload associated with participating in a simulation can be compensated for by cutting back on other assignments that entail considerable grading on your part. Grading one less written case or essay exam or other written assignment saves enormous time. With either simulation, grading is effortless, requiring only that you enter percentage weights for each assignment in your online grade book. In sum, a three-pronged text-case-simulation course model has significantly more teaching/learning power than the traditional text-case model. Indeed, a very convincing argument can be made that a competition-based strategy simulation is the single most effective teaching/learning tool that instructors can employ to teach the discipline of business and competitive strategy, to make learning more enjoyable, and to achieve course learning objectives.
A Bird’s-Eye View of The Business Strategy Game The setting for The Business Strategy Game (BSG) is the global athletic footwear industry (there can be little doubt in today’s world that a globally competitive strategy simulation is vastly superior to a simulation with a domestic-only setting). Global market demand for footwear grows at the rate of 7–9% annually for the first five years and 5–7% annually for the second five years. However, market growth rates vary by geographic region—North America, Latin America, Europe-Africa, and Asia-Pacific. Companies begin the simulation producing branded and private-label footwear in two plants, one in North America and one in Asia. They have the option to establish production facilities in Latin America and Europe-Africa, either by constructing new plants or buying previously constructed plants that have been sold by competing companies. Company co-managers exercise control over production costs based on the styling and quality they opt to manufacture, plant location (wages and incentive compensation vary from region to region), the use of best practices and Six Sigma programs to reduce the production of defective footwear and to boost worker productivity, and compensation practices. All newly produced footwear is shipped in bulk containers to one of four geographic distribution centers. All sales in a geographic region are made from footwear inventories in that region’s distribution center. Costs at the four regional distribution centers are a function of inventory storage costs, packing and shipping fees, import tariffs paid on incoming pairs shipped from foreign plants, and exchange rate impacts. At the start of the simulation, import tariffs average $4 per pair in Europe-Africa, $6 per pair in Latin America, and $8 in the Asia-Pacific region. However, the Free Trade Treaty of the Americas allows tariff-free movement of footwear between North America and Latin America. Instructors have the option to alter tariffs as the game progresses. Companies market their brand of athletic footwear to footwear retailers worldwide and to individuals buying online at the company’s Web site. Each company’s sales and market share in the branded footwear segments hinge on its competitiveness on
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11 factors: attractive pricing, footwear styling and quality, product line breadth, advertising, the use of mail-in rebates, the appeal of celebrities endorsing a company’s brand, success in convincing footwear retailers dealers to carry its brand, the number of weeks it takes to fill retailer orders, the effectiveness of a company’s online sales effort at its Web site, and customer loyalty. Sales of private-label footwear hinge solely on being the low-price bidder. All told, company co-managers make as many as 53 types of decisions each period that cut across production operations (up to 10 decisions each plant, with a maximum of 4 plants), plant capacity additions/sales/upgrades (up to 6 decisions per plant), worker compensation and training (3 decisions per plant), shipping (up to 8 decisions each plant), pricing and marketing (up to 10 decisions in 4 geographic regions), bids to sign celebrities (2 decision entries per bid), financing of company operations (up to 8 decisions), and corporate social responsibility and environmental sustainability (up to six decisions). Each time company co-managers make a decision entry, an assortment of onscreen calculations instantly shows the projected effects on unit sales, revenues, market shares, unit costs, profit, earnings per share, ROE, and other operating statistics. The on-screen calculations help team members evaluate the relative merits of one decision entry versus another and put together a promising strategy. Companies can employ any of the five generic competitive strategy options in selling branded footwear—low-cost leadership, differentiation, best-cost provider, focused low-cost, and focused differentiation. They can pursue essentially the same strategy worldwide or craft slightly or very different strategies for the Europe-Africa, Asia-Pacific, Latin America, and North America markets. They can strive for competitive advantage based on more advertising or a wider selection of models or more appealing styling/quality, or bigger rebates, and so on. Any well-conceived, well-executed competitive approach is capable of succeeding, provided it is not overpowered by the strategies of competitors or defeated by the presence of too many copycat strategies that dilute its effectiveness. The challenge for each company’s management team is to craft and execute a competitive strategy that produces good performance on five measures: earnings per share, return on equity investment, stock price appreciation, credit rating, and brand image. All activity for The Business Strategy Game takes place at www.bsg-online.com.
A Bird’s-Eye View of GLO-BUS The industry setting for GLO-BUS is the digital camera industry. Global market demand grows at the rate of 8–10% annually for the first five years and 4–6% annually for the second five years. Retail sales of digital cameras are seasonal, with about 20 percent of consumer demand coming in each of the first three quarters of each calendar year and 40 percent coming during the big fourth-quarter retailing season. Companies produce entry-level and upscale, multi-featured cameras of varying designs and quality in a Taiwan assembly facility and ship assembled cameras directly to retailers in North America, Asia-Pacific, Europe-Africa, and Latin America. All cameras are assembled as retail orders come in and shipped immediately upon completion of the assembly process—companies maintain no finished goods inventories and all parts and components are delivered on a just-in-time basis (which eliminates the need to track inventories and simplifies the accounting for plant operations and costs). Company co-managers exercise control over production costs based on the designs
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and components they specify for their cameras, work force compensation and training, the length of warranties offered (which affects warranty costs), the amount spent for technical support provided to buyers of the company’s cameras, and their management of the assembly process. Competition in each of the two product market segments (entry-level and multi-featured digital cameras) is based on 10 factors: price, camera performance and quality, number of quarterly sales promotions, length of promotions in weeks, the size of the promotional discounts offered, advertising, the number of camera models, size of retail dealer network, warranty period, and the amount/caliber of technical support provided to camera buyers. Low-cost leadership, differentiation strategies, best-cost provider strategies, and focus strategies are all viable competitive options. Rival companies can strive to be the clear market leader in either entrylevel cameras or upscale multi-featured cameras or both. They can focus on one or two geographic regions or strive for geographic balance. They can pursue essentially the same strategy worldwide or craft slightly or very different strategies for the Europe-Africa, Asia-Pacific, Latin America, and North America markets. Just as with The Business Strategy Game, most any well-conceived, well-executed competitive approach is capable of succeeding, provided it is not overpowered by the strategies of competitors or defeated by the presence of too many copycat strategies that dilute its effectiveness. Company co-managers make 49 types of decisions each period, ranging from R&D, camera components, and camera performance (10 decisions) to production operations and worker compensation (15 decisions) to pricing and marketing (15 decisions) to the financing of company operations (4 decisions) to corporate social responsibility (5 decisions). Each time participants make a decision entry, an assortment of on-screen calculations instantly shows the projected effects on unit sales, revenues, market shares, unit costs, profit, earnings per share, ROE, and other operating statistics. These on-screen calculations help team members evaluate the relative merits of one decision entry versus another and stitch the separate decisions into a cohesive and promising strategy. Company performance is judged on five criteria: earnings per share, return on equity investment, stock price, credit rating, and brand image. All activity for GLO-BUS occurs at www.glo-bus.com.
Administration and Operating Features of the Two Simulations The Internet delivery and user-friendly designs of both BSG and GLO-BUS make them incredibly easy to administer, even for first-time users. And the menus and controls are so similar that you can readily switch between the two simulations or use one in your undergraduate class and the other in a graduate class. If you have not yet used either of the two simulations, you may find the following of particular interest:
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Time requirements for instructors are minimal. Setting up the simulation for your course is done online and takes about 10–15 minutes. Once set-up is completed, no other administrative actions are required beyond that of moving participants to a different team (should the need arise) and monitoring the progress of the simulation (to whatever extent desired). Participant’s Guides are delivered at the Web site—students can read it on their monitors or print out a copy, as they prefer.
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There are extensive built-in “Help” screens explaining (a) each decision entry, (b) the information on each page of the Industry Reports, and (c) the numbers presented in the Company Reports. The Help screens allow company co-managers to figure things out for themselves, thereby curbing the need for students to always run to the instructor with questions about “how things work.” The results of each decision round are processed automatically and are typically available to all participants 15 minutes after the decision round deadline specified by the instructor/game administrator. Participants and instructors are notified via e-mail when the results are ready. Schedules for the decision rounds are instructor-determined. Decision rounds can be scheduled once per week, twice per week, or even twice daily, depending on how instructors want to conduct the exercise. Following each decision round, participants are provided with a complete set of reports—a 6-page Industry Report, a 1-page Competitive Intelligence report for each geographic region that includes strategic group maps and bulleted lists of competitive strengths and weaknesses, and a set of Company Reports (income statement, balance sheet, cash flow statement, and assorted production, marketing, and cost statistics). Two “open-book” multiple choice tests of 20 questions are built into each simulation. The quizzes, which you can require or not as you see fit, are taken online and automatically graded, with scores reported instantaneously to participants and automatically recorded in the instructor’s electronic grade book. Students are automatically provided with three sample questions for each test. Both simulations contain a 3-year strategic plan option that you can assign. Scores on the plan are automatically recorded in the instructor’s online grade book. At the end of the simulation, you can have students complete online peer evaluations (again, the scores are automatically recorded in your online grade book). Both simulations have a Company Presentation feature that enables students to easily prepare PowerPoint slides for use in describing their strategy and summarizing their company’s performance in a presentation either to the class, the instructor, or an “outside” board of directors. A Learning Assurance Report provides you with convincing empiricat data concerning how well your students performed vis-à-vis students playing the simulation worldwide over the past 12 months. The report is based on measures of student proficiency, business know-how, and decision-making skill and can also be used in evaluating the extent to which your school’s academic curriculum produces the desired degree of student learning insofar as accreditation standards are concerned.
For more details on either simulation, please consult Section 2 of the Instructor’s Manual accompanying this text or register as an instructor at the simulation Web sites (www.bsg-online.com and www.glo-bus.com) to access even more comprehensive information. Using Internet conferencing technology, the simulation authors conduct seminars several times each month (sometimes each week) to demonstrate how the software works, walk you through the various features and menu options, and answer any questions. To sign up for a demonstration, please visit www.mhhe. com/thompsonsims. By all means, please feel free to call the senior author of this
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text at (205) 722-9145 to arrange a personal demonstration or talk about how one of the simulations might work in one of your courses. We think you’ll be quite impressed with the capabilities that have been programmed into The Business Strategy Game and GLO-BUS, the simplicity with which both simulations can be administered, and their exceptionally tight connection to the text chapters, core concepts, and standard analytical tools.
RESOURCES AND SUPPORT MATERIALS FOR THE 17TH EDITION FOR STUDENTS Key Points Summaries At the end of each chapter is a synopsis of the core concepts, analytical tools and other key points discussed in the chapter. These chapter-end synopses, along with the margin notes scattered throughout each chapter, help students focus on basic strategy principles, digest the messages of each chapter, and prepare for tests.
Two Sets of Chapter-End Exercises Each chapter concludes with two sets of exercises. The “Assurance of Learning Exercises” can be used as the basis for class discussion, oral presentation assignments, short written reports, and substitutes for case assignments. The “Exercises for Simulation Participants” are designed expressly for use by adopters who have incorporated use of a simulation and wish to go a step further in tightly and explicitly connecting the chapter content to the simulation company their students are running. The questions in both sets of exercises (along with those Illustration Capsules that qualify as “mini-cases”) can be used to round out the rest of a 75-minute class period should your lecture on a chapter last only for 50 minutes.
A Value-Added Web Site The student version of the Online Learning Center (OLC) or Web site www.mhhe. com/thompson contains a number of helpful aids:
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20-question self-scoring chapter tests that students can take to measure their grasp of the material presented in each of the 12 chapters. A “Guide to Case Analysis” containing sections on what a case is, why cases are a standard part of courses in strategy, preparing a case for class discussion, doing a written case analysis, doing an oral presentation, and using financial ratio analysis to assess a company’s financial condition. We suggest having students read this Guide prior to the first class discussion of a case. PowerPoint slides for each chapter.
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Premium Content Delivered at the Web Site The publisher’s Web site for the text has an assortment of offerings that you may find valuable for your course. Purchasing access to our premium learning resources right on the Web site provides students with the following value-added resources—narrated slides and videos, which along with chapter tests, are also available for iPod download to help students prepare for exams.
FOR INSTRUCTORS Online Learning Center (OLC) In addition to the student resources, the instructor section of www.mhhe.com/ thompson includes an Instructor’s Manual and other support materials. Your McGraw-Hill representative can arrange delivery of instructor support materials in a format-ready Standard Cartridge for Blackboard, WebCT and other Web-based educational platforms.
Instructor’s Manual The accompanying IM contains a section on suggestions for organizing and structuring your course, sample syllabi and course outlines, a set of lecture notes on each chapter, a copy of the test bank, and some of the most comprehensive case teaching notes available with any strategy textbook.
Test Bank and EZ Test Online There is a test bank containing over 900 multiple choice questions and short-answer/ essay questions. It has been tagged with AACSB and Bloom’s Taxonomy criteria. All of the test bank questions are also accessible within a computerized test bank powered by McGraw-Hill’s flexible electronic testing program EZ Test Online (www.eztestonline.com). Using EZ Test Online allows you to create paper and online tests or quizzes. With EZ Test Online, instructors can select questions from multiple McGrawHill test banks or author their own, and then either print the test for paper distribution or give it online.
PowerPoint Slides To facilitate delivery preparation of your lectures and to serve as chapter outlines, you’ll have access to approximately 500 colorful and professional-looking slides displaying core concepts, analytical procedures, key points, and all the figures in the text chapters. The slides are the creation of Professor Jana Kuzmicki of Troy State University.
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Instructor’s Resource CD-ROM All of our instructor supplements are available in this one-stop multimedia resource, which includes the complete Instructor’s Manual, Computerized Test Bank (EZ Test), accompanying PowerPoint slides, and the Digital Image Library with all the figures from the text. It is a useful aid for compiling a syllabus and daily course schedule, preparing customized lectures, and developing tests on the text chapters.
The Business Strategy Game and GLO-BUS Online Simulations Using one of the two companion simulations is a powerful and constructive way of emotionally connecting students to the subject matter of the course. We know of no more effective and interesting way to stimulate the competitive energy of students and prepare them for the rigors of real-world business decision-making than to have them match strategic wits with classmates in running a company in head-to-head competition for global market leadership. Please visit www.mhhe.com/thompsonsims for more information.
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ACKNOWLEDGMENTS A great number of colleagues and students at various universities, business acquaintances, and people at McGraw-Hill provided inspiration, encouragement, and counsel during the course of this project. Like all text authors in the strategy field, we are intellectually indebted to the many academics whose research and writing have blazed new trails and advanced the discipline of strategic management. The following reviewers provided seasoned advice and splendid suggestions for improving the chapters in this 17th edition: Dennis R. Balch Jeffrey R. Bruehl Edith C. Busija Donald A. Drost Randall Harris Mark Lewis Hoelscher Phyllis Holland James W. Kroeger Sal Kukalis Brian W. Kulik Paul Mallette Anthony U. Martinez Lee Pickler Sabine Reddy Thomas D. Schramko V. Seshan Charles Strain Sabine Turnley S. Stephen Vitucci Andrew Ward Sibin Wu
University of North Alabama Bryan College Murray State University–Murray, Kentucky California State University–San Bernardino California State University–Stanislaus Illinois State University Valdosta State University Cleveland State University California State University–Long Beach Central Washington University Colorado State University San Francisco State University Baldwin-Wallace College Calilfornia State University–Long Beach The University of Toledo Pepperdine University University of Houston–Downtown Kansas State University Tarleton State University–Central Texas University of Georgia University of Texas–Pan American
We also express our thanks to Lynne Patten, Nancy E. Landrum, Jim Goes, Jon Kalinowski, Rodney M. Walter, Judith D. Powell, Seyda Deligonul, David Flanagan, Esmerlda Garbi, Mohsin Habib, Kim Hester, Jeffrey E. McGee, Diana J, Wong, F. William Brown, Anthony F. Chelte, Gregory G. Dess, Alan B. Eisner, John George, Carle M. Hunt, Theresa Marron-Grodsky, Sarah Marsh, Joshua D. Martin, William L. Moore, Donald Neubaum, George M. Puia, Amit Shah, Lois M. Shelton, Mark Weber, Steve Barndt, J. Michael Geringer, Ming-Fang Li, Richard Stackman, Stephen Tallman, Gerardo R. Ungson, James Boulgarides, Betty Diener, Daniel F. Jennings, David Kuhn, Kathryn Martell, Wilbur Mouton, Bobby Vaught, Tuck Bounds, Lee Burk, Ralph Catalanello, William Crittenden, Vince Luchsinger, Stan Mendenhall, John Moore, Will Mulvaney, Sandra Richard, Ralph Roberts, Thomas Turk, Gordon VonStroh, Fred Zimmerman, S. A. Billion, Charles Byles, Gerald L. Geisler, Rose Knotts, Joseph Rosenstein, James B. Thurman, Ivan Able, W. Harvey Hegarty, Roger Evered, Charles B. Saunders, Rhae M. Swisher, Claude I. Shell, R. Thomas Lenz, Michael C. White, Dennis Callahan, R. Duane Ireland, William E. Burr II, C. W. Millard, Richard Mann, Kurt Christensen, Neil W. Jacobs, Louis W. Fry, D. Robley Wood, George J. Gore, and William R. Soukup. These reviewers provided valuable guidance in steering our efforts to improve earlier editions.
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As always, we value your recommendations and thoughts about the book. Your comments regarding coverage and contents will be taken to heart, and we always are grateful for the time you take to call our attention to printing errors, deficiencies, and other shortcomings. Please e-mail us at [email protected], [email protected] .ua.edu, or [email protected]; fax us at (205) 348-6695; or write us at P. O. Box 870225, Department of Management and Marketing, The University of Alabama, Tuscaloosa, Alabama 35487-0225. Arthur A. Thompson A. J. Strickland John E. Gamble
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