Pearson New International Edition Strategy A View From The Top Cornelis A. De Kluyver John A. Pearce Fourth Edition International_PCL_TP.indd 1 7/29/13 11:23 AM ISBN 10: 1-292-04036-X ISBN 13: 978-1-292-04036-3 Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk © Pearson Education Limited 2014 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affi liation with or endorsement of this book by such owners. ISBN 10: 1-292-04036-X ISBN 10: 1-269-37450-8 ISBN 13: 978-1-292-04036-3 ISBN 13: 978-1-269-37450-7 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Printed in the United States of America Copyright_Pg_7_24.indd 1 7/29/13 11:28 AM 11111357914681313175517 P E A R S O N C U S T O M L I B R AR Y Table of Contents 1. What is Strategy? Cornelis A. de Kluyver/John A. Pearce II 1 2. Strategy and Performance Cornelis A. de Kluyver/John A. Pearce II 17 3. Analyzing the External Strategic Environment Cornelis A. de Kluyver/John A. Pearce II 35 4. Analyzing an Industry Cornelis A. de Kluyver/John A. Pearce II 55 5. Analyzing an Organization's Strategic Resource Base Cornelis A. de Kluyver/John A. Pearce II 71 6. Formulating Business Unit Strategy Cornelis A. de Kluyver/John A. Pearce II 97 7. Business Unit Strategy: Contexts and Special Dimensions Cornelis A. de Kluyver/John A. Pearce II 113 8. Global Strategy Formulation Cornelis A. de Kluyver/John A. Pearce II 141 9. Corporate Strategy: Shaping the Portfolio Cornelis A. de Kluyver/John A. Pearce II 163 Index 181 I This page intentionally left blank (cid:2) (cid:2) (cid:2) What Is Strategy? INTRODUCTION How did Google become the world’s number one search engine? What is the secretto Apple’s success? Can Wal-Mart continue its relentless growth? Why does Southwest Airlines consistently outperform its many rivals? What makes the Starbucks brand so powerful? How important is it for a company to be first in developing a new product or entering a new market? Which elements of a company’sstrategy can be globalized? These kinds of questions go to the heart ofstrategy formulation. Understanding how a strategy is crafted is important, because there is a proven link between a company’s strategic choices and its long-term performance. Successful companies typically have a better grasp of customers’ wants and needs, their competitors’ strengths and weaknesses, and how they can create value. Successful strategies reflect a company’s clear strategic intent and a deep understanding of its core competencies and assets—generic strategies rarely propel a company to a leadership position. Formulating a sound strategy requires both analysis and synthesis and therefore is as much a rational act as it is a creative one. Knowing where to go and finding carefully considered, creative ways of getting there are the hallmarks of successful strategy development. STRATEGY DEFINED It is hard to imagine a business conversation that does not include the word strategy. We talk about Wal-Mart’s distribution strategy, Coca-Cola’s strategy in China, Amazon’s e-business strategy, McDonald’s human resource strategy, IBM’s market- ing strategy, Intel’s technology strategy, and so on. Its frequent use would suggest that the term strategy is unambiguous and its meaning well understood. Unfortunately, it is not; much of what is labeled strategyin fact has little to do with it. Although numerous attempts have been made at providing a simple, descriptive definition of strategy, its inherent complexity and subtlety preclude a one-sentence description. There is substantial agreement about its principal dimensions, however. From Chapter 1 of Strategy: AView from the Top, 4/e. Cornelis A. de Kluyver. John A. Pearce II. Copyright © 2012 by Pearson Education. Published by Prentice Hall. All rights reserved. 1 What Is Strategy? Strategy is about positioningan organization for competitive advantage. It involves mak- ing choicesabout which industries to participate in, what products and services to offer,and how to allocate corporate resources. Its primary goal is to create value for shareholders and other stakeholdersby providing customer value. Strategic Thinking Continues to Evolve Defining strategy in terms of positioning an organization for competitive advantage with the goal of creating value is useful in framing a number of key questions. What do we mean by positioning an organization for competitive advantage? How should value be defined? The answers to these questions are complex. What is more, they change as the context in which strategy is developed continues to change. Today’s competitive environment is very different from the one executives faced 25 years ago. Afew decades from now, the strategic environment will once again have changed considerably. The evolution of strategic thinking over the last 50 years reflects these changes and is characterized by a gradual shift in focus from an industrial economics to a resource-basedperspective to a human and intellectualcapital perspective (Figure 1). It is important to understand the reasons underlying this evolution, because they reflect a changing view of what strategy is and how it is crafted. The early industrial economics perspective held that environmental influences— particularly those that shape industry structure—were the primary determinants of a company’s success. The competitive environment was thought to impose pressures and constraints, which made certain strategies more attractive than others. Carefully choosing where to compete—selecting the most attractive industries or industry segments—and controlling strategically important resources, such as financial capital, became the dominant themes of strategy development at both the business unit and corporate levels. The focus, therefore, was on capturing economic value through adept positioning. Thus, industry analysis, competitor analysis, segmentation, positioning, and strategic planning became the most important tools for analyzing strategic opportunity.1 As globalization, the technology revolution, and other major environmental forces picked up speed and began to radically change the competitive landscape, key assump- tions underlying the industrial economics model came under scrutiny. Should the competitive environment be treated as a constraint on strategy formulation, or was strategy really about shaping competitive conditions? Was the assumption that busi- nesses should control most of the relevant strategic resources needed to compete still applicable? Were strategic resources really as mobile as the traditional model assumed, and was the advantage associated with owning particular resources and competencies therefore necessarily short lived? In response to these questions, a resource-based perspective of strategy develop- ment emerged. Rather than focusing on positioning a company within environment- dictated constraints, this new school of thought defined strategic thinking in terms of building core capabilities that transcend the boundaries of traditional business units. It focused on creating corporate portfolios around core businesses and on adopting goals and processes aimed at enhancing core competencies.2 This new paradigm reflected a shift in emphasis from capturing economic value to creating value through the develop- ment and nurturing of key resources and capabilities. 2 What Is Strategy? Products Resources and Competitive Focus and Markets Competencies Talents and Dreams Strategic objective Defensible product- Sustainable Continuous market positions advantage self-renewal Tools/perspectives • Industry analysis; • Core • Vision/values competitor analysis competencies • Segmentation and • Resource-based • Flexibility and positioning strategy innovation • Strategic • Networks • Entrepreneurship planning Key strategic resource Financial capital Organizational Human and capability intellectual capital FIGURE 1 The Evolving Focus of Strategy Source:Reprinted from “Building Competitive Advantage Through People” by Christopher A. Bartlett and Sumantra Ghoshal, MIT Sloan Management Review, Winter 2002, pp. 34–41, by permission of publisher. Copyright © 2002 by Massachusetts Institute of Technology. All rights reserved. The current focus on knowledge and human and intellectual capitalas a company’s key strategic resource is a natural extension of the resource-based view of strategy and fits with the transition of global commerce to a knowledge-based economy. For a majority of companies, access to physical or financial resources no longer is an impediment to growth or opportunity; not having the right people or knowledge has become the limiting factor. Microsoft scans the entire pool of U.S. computer science graduates every year to identify and attract the few it accepts. It recognizes that competency-based strategies are dependent on people, that scarce knowledge and expertise drive product development, and that personal relationships with clients are critical to market responsiveness.3 It is interesting to note that researchers are reintroducing the idea of a company’s environment as a determinant of performance, albeit in a different way. Astudy into how companies such as Wal-Mart and Microsoft have achieved dominance in their respective industries revealed that a substantial portion of their success is attributable to the success of their ecosystems, the loose networks of suppliers, distributors, contract manufacturers, makers of related products and services, technology providers, and others that play an important role in the creation and the delivery of their products and services. Thoughtful strategy formulation, therefore, should look beyond a company’s immediate opportunities and capabilities and also promote its ecosystem’s overall health.4 Wal-Mart’s procurement system, for example, also offers suppliers valuable real-time information on customer preferences and demand that they could not gather for themselves at the same level of cost. Strategy Versus Tactics New business concepts, technologies, and ideas are born every day. The Internet, inno- vation, outsourcing, offshoring, total quality, flexibility, and speed, for example, all have come to be recognized as essential to a company’s competitive strength and agility. As 3 What Is Strategy? aresult, corporations continue to embrace initiatives such as six sigma, quality manage- ment, time-based competition, benchmarking, partnering, reengineering, and a host of other concepts in an all-out effort to enhance competitiveness. Some of these initiatives have produced dramatic results. Automobile manufac- turers have spent billions of dollars reengineering their design and production processes. As a result, unit costs have fallen dramatically, quality has gone up, relationships with component manufacturers and other suppliers are stronger, and the time needed to take a new car from concept to production has been cut in half. Though such results are gratifying, it is important to put them in their proper context. Enhancing operational effectiveness is crucial in today’s cutthroat competitive environment, but it is no substitute for sound strategic thinking. There is a difference between strategy and the application of operational tools and managerial philosophies focused on operational effectiveness. Both are essential to competitiveness. But whereas the application of managerial tools is aimed at doing things betterthan competitors and therefore tactical in nature, strategyfocuses on doing things differently.Understanding this distinction is critical, as recent history has shown. Companies that embraced the Internet as “the strategic answer” to their business rather than just another, if important, new tool were in for a rude awakening. By focusing too much on e-business options at the expense of broader strategic concerns, many found themselves chasing customers indiscrimi- nately, trading quality and service for price, and, with it, losing their competitive advantage and profitability.5 Long-term, sustainable superior performance—the ultimate goal of strategy—can only occur if a company can preserve meaningful differences between itself and its rivals. E-business initiatives, total quality management, time-based competition, bench- marking, and other tactics aimed at improved operational performance, however desirable and necessary, are generally fairly easily imitated. Enhanced performance attributable to such actions is at best temporary. Good Strategy Forces Trade-offs, Creates Fit Strategic thinking, instead, focuses on taking different approaches to delivering customer value; on choosing different sets of activities that cannot easily be imitated, thereby providing a basis for an enduring competitive advantage. When Dell pioneered its highly successful direct sales, made-to-order business model, it carefully designed every aspect of its manufacturing, sourcing, and inventory system to support its low- cost, direct-sales strategy. In the process, it redefined value for many customers in terms of speed and cost and created major barriers to imitation. Its competitors, stuck with traditional distribution networks and manufacturing models, faced a difficult choice: abandon the traditional business model or focus on alternative ways of delivering customer value. ING DIRECT provides another example of a company with a potentially (industry) transformative strategy that forces competitors to reexamine their entire business model. ING DIRECT operates a branchless direct bank with operations in Australia, Austria (branded ING-DiBa), Canada, France, Germany (branded ING-DiBa), Italy, Spain, the United Kingdom, and the United States. It offers services over the Internet and by phone, ATM, or mail and focuses on simple, high-interest savings accounts. 4 What Is Strategy? Customers do business exclusively online, over the phone, or by mail. The bank’s value proposition is simple and direct—great rates, 24 × 7 convenience, and superior customer service. In the United States alone, ING DIRECT has already attracted more than two million customers. Headquartered in Wilmington, Delaware, with Internet cafes in Philadelphia, New York, Los Angeles, and Wilmington, ING DIRECT is part of a global financial institution of Dutch origin that offers banking, insurance, and asset management to more than 60 million private, corporate, and institution clients in more than 50countries. Whereas operational effectiveness tools can improve competitiveness, they do not by themselves force companies to choose between entirely different, internally consistent setsof activities. IBM and other competitors could have responded to Dell’s innovative strategy by also selling directly to end users, but they would have had to dismantle their traditional distribution structures to reap the benefits Dell realizes from its strategy. Thus, choosing a unique competitive positioning—the essence of strategy— forces trade-offs in terms of what to do and, equally important, what notto do and cre- ates barriers to imitation. Positioning choices should not only dictate what activities a company chooses to perform and how it will perform them, but they should also specify how they interrelate to form a coherent set that differentiates the chosen activity set from competitive bun- dles of activities. Figure 2shows how Southwest Airlines’ strategy is based on a careful- ly integrated set of activities that is more than just a collection of parts. The different ac- tivities fit together and reinforce each other to create real economic value. Collectively, they deter imitators, who are forced to duplicate the entire chain of value-creating activ- ities rather than individual components if they wish to achieve similar results. Strategy Must Focus on Value Creation A good strategy focuses on creating value—for shareholders, partners, suppliers, employees, and the community—by satisfying the needs and wants of customers better than anyone else. If a company can deliver value to its customers better than its rivals can over a sustained period of time, that company likely has a superior strategy. This is not a simple task. Customers’ wants, needs, and preferences change, often rapidly, as they become more knowledgeable about a product or service, as new competitors enter the market, and as new entrants redefine what value means. As a result, what is valu- able today might not be valuable tomorrow. The moral of this story is simple but powerful: The value of a particular product or service offering, unless constantly maintained, nourished, and improved, erodes with time. To see how a value proposition can change over time, consider the U.S. market for coffee. Thirty years ago, coffee was more or less a commodity. Traditional coffee shops and “office” coffee defined consumer behavior, and Nescafe, Folgers, and Hills Brothers accounted for approximately 90 percent of the retail market. Then Starbucks came along. The company redefined “drinking a cup of coffee” into a new value proposition consisting of three elements: (1) “great” coffee—Starbuck’s relentless search for the highest quality coffee in the world was the cornerstone of a differentiated market posi- tioning; (2) a unique physical environment—Starbucks created a “second” living room for customers to enjoy their coffee, relax, and meet people; and (3) a new service 5