t*

PA#E-r
**Ftr
)j :':'::li

{nrr*ctrucing

Straregic
ManaSernent
In ThisChapterWeChaltengeyoulo

))>

1. Understand
whata strategy
isand identifythe

2. Understandwhy we studystrategic
management.
3. Understand
the relationship
betweenstrategyformulotion.
andimplementation.
4. Describethe determinantsof
competiti ve a dvantage.
5 . Recognizethe difference
between the fundamental
and dynamic views of
competitive advontag e.

*&-

ClickCtack

David Challenging
Goliath
/
Q/*"tue

yearsago,Kevinplankwasa walk-on

footballplayerfor the University

of Maryland
Terrapins.
Hehatedhow hiscottonT-shirtsbecamesoakingwet with
sweatduringeverypractice.The
wet T-shirts
wouldcause
gainseveralpoundsin weight,andgenerally
chaffing,
just feel
veryuncomfortable.
Hewonderedwhy,in an eraof microfiber
fabricwith moisture-wicking
properties,
heandotherfootballplayers
hadto put up with uncornfortable
cottonT-shirts
undertheirshoulder
pads.Runners,
bicyclists,and
otherswerealreadybenefitingfromclothingmadeof advanced
materials
to
maketheirworkoutsmorecomfortable.
Plank,
whcjgrewup alwayslookingfor a wayto make
money,went
to a fabricstoreandboughta boltof moisture-wicking
fabricandpaid

-_3-

pnnf ONE
Strategyand StrategicLeadershipin
DynamicTimes

a tailorto makeseveral
prototypeshirts.
Plank's
teammates
enviedhisnewshirts,
soheset
out to makemoresampres.
Heofficiaily
launched
hiscompanyout of hisgrandmother,s
basement
andcailed productunderRrmouro.
Asyou canseefronrthe snapshot
'l'1,sales his
in
Exhibit
in 2006were9430miilion,and
thecompany,s
equity
was
varued
at
over
5i '8 billion'1
with suchdominantincumbents
asNikeandadidas,
howdid planksuccessfullyenterand grow hiscompanyinto
one of the bestperfornring
companies
on warl
street?Apparentry,
at reastearryon,itscompetitors
did not heeuinder Armour,s
sawy
and mega-successful
advertising
campaign'titled,,click-clack:r
think
you
hear
us
com_
ing!"Although
UnderArmourhasbeensu-ccessrut
to oate,srr-,0*,[-'."0 othersdid not
standidlyby whilewatchingitscustomers
migrateto the newupstarr.
what canunder
Armourdo to maintainandgrowitsposition
in the industry?
Let,sfirsttookat the indus_
reviewUnderArmour's
strategyforentering
andcornperinq
in thisdynamic
ilyj:Tr?.-""

Exhibit1.1 UnderArmourat a Glance

saso,osg006
57,300,000
1,800,000,000
R e v e n u eD i s t r i b u t i o n

Apparel
m e n ' s5 9 . 4 %
w o m e n ' s1 9 . 9 o %
youth 7.4%o
faolwear 6.2o/o
accessories3.5o/o
licensing revenues 3.602

grrnO,unOTruOaturt,

NYSETicker
(Wentpubticin August
200s)
KevinPlank'sVisifn

Under Armouro, HeatGear@,

ColdGear@,
AllSeasonGearo,
LooseGearo,Under Armour
design mark, ProtectThis HouserM,
Duplicityru,
You HearUs comingTur
ano ctiit<ctactri*
;ink

To becomethe #1 performanceathleticbrand in the world

*-q{asqQwF

--

l^
-l

Chapter

1 :"> Introducinq Strategic Managemenl

The.Performance
ApparerIndustry UnderArmourparticipates
in tne sportsapparel
market,which
NPDGroup,a
leading
providerof
consumerand
retailmarketresearch
information,
estimated
wasa 545billionmarketin 2006.Approximately
30 percentof the
marketissyntheticprof,uctandpurchased
for usein activesportor exercise.While
one
mightalsumethat Nikedominates
the market,in factthe aciivesportsapparelmarket
isfragmented-10brandscombineto comprise
the top 30 percentof the market.
Historically,
exercise
clothingconsistedof productsmadewith relativelyunsophisticateddesignandgenericfabrics.The
mostcommonshirtusedin exercise
wasa standard cotton T-shirt,often decoratedwith logos and companyor
team names.In
segmentslike runningand basketball,
jerseysmadeof syn_
therewere specialized
theticfibersand tanktop designsthat improvedperiormance.
Lycraorevolutionized
sportswear
in the latetwentiethcentury,andthe microfibers
revolutionized
the marketlater.Fabrics
likefleeceandSympatex@
werespecifically
developed
for fluctuations
in weatherconditions.
lt is unlikelythat streetfashionwould haveadoptedthem so
readilyif therehadnot beenthe statusassociation
of sportingprowess.When
thiswas
combinedwith effective
functionalutility,a fabricfashion*ui bornthat encompassed
all agesfrom young skateboarders
to maturegolfers.Moisture-management
fibers
were developedto accommodate
the desirefor more comfortablesportswear.
Accordingto Dupont,who inventedcoolmax@
andTactelo,
functionis paramount.These
fibersareusedcommonlytodaynot onlyin sportsapparel,
but in otherproductsrangingfromsocksto lingerie.
Theperformance
apparelsegmentof thesportsapparelmarketisgrowingmorerapidly
thanothersegments.This
growthisfueledby demographic
trendsand increased
consumerawareness
andparticipation
in activelifestyles.
Duringthe pasttwo decades,consumershavecontinuedto spendheavilyin the areasof weightlossanddieting,fitness
centermemberships,and
sportsandathleticequipment.And
sportsenthusiasts
tendto
spendmorefor theirequipmentthancasualusers,which
translates
to the possibility
for
higherpricepointsandgreatermargins.
As upstartslikeUnderArmourin sportsappareland Sketchers
in specialized
footwear
havegainedstrongfootholdsin emergingsegments,
industrygiantslikeNikeandadidashavetakennoticeandresponded
in kindwith theirown specialized
products.
However,whilethe marketis largeandgrowingrapidly,
incumbents
in traditionalsegments
of the industryhavenot grownasrapidly.
UnderArmour'sEntry TheoriginalUnderArmourshirtthat KevinPlankdesigned
was
madeasa form-fittingcompression
usingmicrofiberthat wouldwick perspiration
away
fromthebodyanddryquickly.The
shirtS
heshared
withteammates
werea bighitandthis
led him to believetherewasa marketfor these"performance
shirts."He guessedthere
wouldbe a big marketfor hisshirtsamongprofessional
and amateurathletes
who,like
himselfwereirritatedby workingout in cottonshirtsbut continuedto do so sirpplybecausetherewerefew alternatives.
KevinPlankfiguredhehada winningproductthat was
quitedifferentfromcurrentproducts.
Hisproducthasthreedistinctfeatures.
First,the
fabricwicksmoistureanddriesquickly(asweat-soaked
cottonT-shirtcanweightwo to three
pounds).
Second,
Plankuseda compression
design-tight,form-fitting
cutsthat reduced
theamountof fabricandimprovedcomfortwhenwornundera uniform(andequipment
pads).Third,
likeshoulder
UnderArmourshirtsweremadewith a tagless
convendesign;
tionaltags
onthecollaroftenirritate
theneckof athletes.
Plankdesigned
a waytoheat-seal
the tag informationdirectlyto thefabricratherthanneedingto sewon a separate
tag.
With a superiorproductdesignedfor a specificmarket,Plankstillfacedthe issueof
how to get his productto market.Likemanyentrepreneurs,
he startedwith who he

panr oNE

strategy and strategic Leadership

in Dynamic Times

knew-formerteammates
fromcotegeandprepschoor
whowerenowprayingin the
NFL'He figuredthar if he courd
professionar
9;i;;;"
athletefto usethe product,
teammates
wouldhoundthemfo"rtr'eirown
shirts,
much
likehiscollegeteammates
did at Maryland'
whiie working g",ii"J athletes
to.demand
r,i, proou.t,plankalso
went about securingwhoresare
""u,ia
.."ti'itaccounts.
Earry
NFL
prayerswho started
wearingUnderArmourshirts.incruded
fuarterbacks
Jeffc"orgu'unoFrankwycheck
(aformerMaryrand
teammat)andail o.
hailof fame,".ui*r r"rry Rice.In base_
ball,Rogercremensgot UnderArmou'oiting
""a
by beingan earryadopterof the new
isauaitart"

;"::1:?33;nXiJj,'#:u'

unol2,o*osportins
"'l',r,"Iniernet,-catarosi

with the earrysuccess

of the basicproduct,UnderArmour
setout to find naturalprod_
uct extensions'The
firstproductgrowthcamein expanding
rro,.ntn" basicshirt,known
asAllSeason
Gear@,
to HeatGear6ana
CotJC"aro,
productsdesignedto be worn in
hot
climates
or cordtemperatures
whirestiilprovidingthe basicp"rrJrn-',un."
technorogy
of
the originalproduct.Later,Undernrmour
loot"Jro,.uaoitionuigrowth
from new geo_
graphicareas.The
majortargetsfor internationar
expansion
todayareEuropeandAsia.
Morerecently,
UnderArmourr,ur
into new productund ,po*, segments.
In
2006,UnderArmour
"*p.nou.J
wtrat
trasprovedto be a highrysuccessfur
.raunched
rine
of
footwear.The
specific
targetarea?Footbailand basebail
creats.
why did UnderArmour
pickthis particurar
pranksaysthai the
segment?
UnderArmou'.,,iu,.gy is not to be a
nicheplayerin footba' (or basebat)
i"uir. nutr,ur,
thissegmentis designedto be the
platformfromwhichto launchinto
a broalerathleticfootwearpositionat
a latertime.
Because
so manyfootbailand basebail
pruy"rtwerearreadyusingUnder
Armour
per_
formanceshirts,UnderArrgu.r.l:],.,r,.i,r,.'"i
wourdbe a very receptiveaudiencefor
footwear.The
highrysuccessfur"crick-crack,,advertising
campaignproperedUnderAr_
mour to a fabulousfirst yearin footwear;
in its firstyeJrof ,.nurti"tingcreats,Under
Ar_
mour captured20 percentmarketshare
overail,and an ururinf 40 percentof the
marketfor creats
pricedover570rrn 2007,under
Armourraunched
[nesof performance
sunglasses
andsportswatches,
bothtargetedat the premiumpricesegmenrs.
UnderArmour'stargetsfor growthin the near
futurefocuson threemainareas.
First,
Plankplansto continueto reinvigorate
the coreproducts,
whicharemen,sandwomen,s
apparel.And,
UnderArmourisjust beginningto growin the women,s
market.within
the
basicproductsegment,
UnderArmoi,rr""i roomto expandinto other
sports.Forin_
stance'
withinthe lastyear,UnderArmourstartedto noti."
that theirshirtswereshowing up on golfcourses'Golfers
who usedthe productsin otheractivities
sawthe benefits
of the productwhilespendinghourson the golf
course.That
led UnderArmourto start
marketinga specific
polo-style
shirtlinethro'ughgolf storesand laterto starta full
line
of golf apparel.similarly,under Armour now
targetsoutdoor adventureseekers
(climbers,
hikers,
skiers),
rargery
because
they noticedthe productbeingusedin those
venues'In addition,UnderArmourseeslotsof growth
opportunityin footwear.
Football
andbaseball
cleatsareseeRasa mechanism
to get UnderArmouiintothisvastandpo_
tentiallylucrative
market.
Analysts
areanxiousto knowwhenUnderArmourwill move
intoothersportsshoes(e.g.,
pranksimpryresponds,,,when
running,basketbail).
thetime
is right."Finally,
UnderArmourhasjust begunto get serious
aboutinternationar
expansion'UnderArmourrecentlyopeneda European
officeto leadnegoiiations
with local
athletesanddistributors.
In a recentconference
c.allwith financialanalysts
coveringUnderArmour,s
stock,Kevin
Plankwasaskedhow Nikeand adidascouldhavebeen
tiken by surpriseby UnderAr_
s entryintothe performance
apparelsegment.Indeed,
UnderArmourisnowcredloyr
itedwith creatingthe sportsperformance
tagrunt because
formerprooucrsareseen

Chapter

1 >:

lpt166s",ng Strategic Management

Exhibit1.2 UnderArmour,s
CumulativeTotal
StockMarket
450

400

- rnO'

350

9, zso
E zoo
L)

"

100

|J__FiF

\lJIw:;-*

300

150

^ -d.1oU\,-""#

,r'oF-

_d:_"

Textile-APParet

ffi
NASDAQ

Market Index

50

:
:

UnderArmour,
Inc.

i).:r.os
-

100.00

214.89

381.08

Hemscott Group TextileA p p a r e lC l o t h i n gI n d e x

100.00

11 3 . 0 0

1 3 172

NASDAQMarket Index

100.00

98.78

1 0 1. 8 2

assotechnologically
backwards.Analysts
posedthe question:,,How
wasthe doorleftso
wideopen(foryourentry)?"
Plank's
response
wastelling:"1
don'tknow,but ourjob isto
closethatdoor."He
wenton to commentthat nobodythoughtconsumers
wouldspend
525to $35for aT-shirt.
Heconcluded
by notingthatwhenyougivethe consumer
some
tangiblebenefit,
you'reableto reinvententireproductcategories.
Evidently,
assummarizedin Exhibit1'.2,
in itsfirstyearof tradingasa publiccompany,
wall streetappeared
\
to likePlank's
playsasmuchasconsumers
did.2
Whyaresomefirmsincredibly
successful
whileothersarenot?Andwhy is it that once
they'resuccessful,
sofewcansustaina highlevelof success?
Wearesurethatyouarefamiliarwith manyoncesuccessful
firms,thattodayno longerenjoysuchsuccess.
In this
text,we'llintroduceyou to the conceptsthat you'llneedto answerquestionsabout
gainingandsustaining
success
in theworldof business
competition.
<<<

T h r e e O v e r a r c h i n gT h e m e s
As you ve probably gatheredfrom the topic of this book-strategic managemenf-a firm's
performanceis directly relatedto the quality of its strategyand its competencyin implementingit. You alsoneedto understandthat concernsabout strategy,sometimesreferredto
policy,preoccupythe minds of many top executives.Their responsibility is to see
as business
that the firm's whole is ultimately greaterthan the sum of its parts-whether theseparts are
distinct businessunits, such as Under Armour's men's apparel and footwear,or simply the
functionalareasthat contributeto the performanceof'one particularbusiness,suchasUnder Armour's distribution through national sporting goodschains.Good strategiesare affected b5 and affect all ol the functional areasof the firm, including marketing, finance,
accounting,and operations.Thus, we'll also introduceyou to the conceptsand tools that
you'll need to analyzethe conditions of a firm and its industry, to formulate appropriate
strategies,
and to determinehow to implement a chosenstrategy.

* f oY

panr oNE

strategy and strategic Leadership

in Dynamic Times

r.t]:i:T:,'A:*###H?:ghout

thisbookarecriticar
tc,trcvciopirrg
c.'rperency
inthe

l. Firms and industri es

are dynamic in nature. Jn reccnt
r.ears,theoriesand research

:**r*:ri.,rmi*;iti;;iilH;j
j:".#:?
,U:F'::;:i,triff

both firms and their competitive

Itt eas1,,
firr i'srarce, ro look at a fi_
nancial snapshotof under
"""JJ-"",s.
Armour
urrJ u',d.rrtund thc c.'rpetitive
position that it
itsindustry'
Butweneed

;:Irffi:il:

to seeunderArn*rur,.,,,,-o.
u s'apshot
atone

isn,tthe*,r,","'ll"!i::*:.:::::Ji:Ti,ilF;lf
,.r.:,,j,,ff
*;*,.,.',.,::ff

madeovertime. under Ar*ouri

*r..", ,ro.r. of resourcesand capabilitie.s
weren,tal_
waysavailableto the firm; they
had to be develop"d dy,r;;i;iu
i.i. ,".,""ce, entering
segmentsdominatedby companies
such asNike and'adida,...r.,,.i
it to deveropex_
ceptionalcapabilitiesin design
und -u.k.iirg. And ast"r'pti,rg
,r, ir rsto ,se hindsight
to seesomeof under Armour's
competito;sas inept, tt .,u a;ir,t
.ii iary by while Un_
der Armour ascended,
created
;';;;;egments,
ancl
stole
rnarket
sharein existing
""*
segments'Indeed' Nike now has
its own line of .omp..rrinr., p..io.rrrur-'..
sportsap_
parel' For pedagogicalsimplicity,
*. fi.rt-int.odu.. .on.," n,lrJ.,r""or
conceptsin
strategicmanagementand rhen
move on to discuss,h.:.;;:;r;;'nna
,oot, that man_
agersuseto think of strategyin
dynamic terrns.
2' Tosucceed',theformurationofagoodstrategyanditsimprementarionshouldbein_
extricabry connected.
many managerstencr10 lbcus on fbrrnurating
1-t"11rtr"1lry,
a
plan of attackand givetoo
little thought to 1*pt.-l.,ting it unliiirt
,oo
lare.
Likewise,
they may similarly give short shrift
tl trr. i-portu.rce of straregiclea<iership
in effectively bridging strategyformulation
and rmprementatior.r,' io.i-..r.nrch
suggests
that, on average'managersare better
at formulating strategiesttrurr'ur.yare
at
imple_
menting them. This problem has been
describedas a..knorving_cloing
gap.,,:
Effective
managersrealizethat successfulry
implementinga good ide, is'"t i.o.t u.
important as
generatingone' To implement strategies,
the organization,sleaciershave numerous
leversat their disposal.Levers,.rah
ur"o.g*ization structure,s'ste's .nd processes,
and peopleand rewardsare tools that
hel"pstrategistsachievcalis''rent-that
is, the
needfor all of the firm's activitiesto
complementeachother and support the
strategy.
3' strategic leadership is essentialif
a firm is to both formulate and implement
strate_
gies that create varue. strategic leaders
are those respo'sibre ft',. ib.nruruting firms,
strategies,
suchasKevin plank at underArmour. They^have
this resgxrsibilityasa con_
sequenceof their hierarchicalstatusin management.
In additio', .stratcgicleadership
plays two critical roles in successfurstrategy
implementation,ancl it.s important to
highlight them here so that you can inco.pirute
them into your own assessrnent
of a
strategy'sfeasibilityaswell as ensurethat you
include theselorcsir.,1.u,. implementa_
tion plans' Specifically'strategicleadershipis
responsiblcfor ( I ) rnakrngsubstantive
implementation-lever.andresource-allocation
clecisionsancl (zj clcvelopingsupport
for the strategyfrom key stakeholders.

What ls S t r a t e g i c M a n a g e m e n t ?
strategic management
Process
bywhicha firmmanages
rne
lorfiitlation
andimplementatiOn
of
a srategy.

Strategicmanagement is the processby which

a firm managesthe fornrulation and implementation of its strategy.But we still need
to ask ourselves:what is the goal of strategic management?what does"having a strategy"
mean?Even if rve,refretty sure that we
t strategyand a goal for it, how do *. ino* whether we
ha'c a good srrategyor a
l"t:
bad one?

L,naptef l

tntfo{rrlin!i

Stf ittegic Management

T p {g s T f f&
i y - s # { { L # & f fiiI $ t , sp * s 5 p f r
ilTAVF

Theword strategyisderived
fromthe Greek
st,ratego.s.
Roughlytransiatecl,
it means.,the
ge'eral'sview,"and thinking aboutmilitary
ranksuna ,.rpoirri'tiliti., i, onc way
to
focus
on
'-t:genera's
vie#

:}i.1t{ii:::j;'51

Cig

!to{ il;il

,i"rorsome
rower-iei,er

migh,besupp',,"*'.1$r1lffiTi!:#:.ffi
i:ffi'L::1fly,:i;li**::,.,'lh

not be too concernedrviththe overall

planbecauseoftheir atte'tion
to detailin spccificareasof responsibility.The_general,
however,must not only understand
how a// of the constituent partsinterrelate,but must
usethui und..rtrrding to draw up
a
plan thar wilr reatl
to victorv-a straresv.rn the business
context,ll: id:1;f ;,;;r;;;,;#efbrc,
suggests
a bigplcture perspectiveon the firm and
its context.we call this hotisiicview
of
th".rganizatio'
the strategicleader'sperspecr
ive.
The success
of a military strategydependsnot
only on the quality of the genera's
plan_
ning and the vision behind it, but"uiro
on tf,. ,

the
.o--u,ra.
leneral's
r' b.,;-;r,
;;;;;;,,;-.T::::l*:$*XT?lJJr:Ti"iT:ffff:

executedby line manage.ll.rn addition,

tte quality of a strategyis often dependent
on rl.rc
leader'ssoliciting and utilizing the advicej-other
senior
-iai.ra leaders.In other
words' a good leadercan't affoid to devise
"#
a strategyin isolation
from the lower-levelleaders who are responsiblefor executineit.
The ideasof strategyneed not folus exclusively
on military analogiesj,st becausethc
root of the word is from this context.You
can seeideasanalogousto the difference
between
the general'sview and the lower-levelofficer's
view in sporti education,personallife,
and
business'The important thing about the
Greekclerivati"" .i,rr. *.ll stategyis that
tl.re
big-pictureperspectiveis funJamentallydifferent
from the a.tuiLor ofrational tactics.
In business,strategyrequiresa big-picture
perspective.up to this point, most of your
businesscourseshaveprobably ro..rJ.a on
important but limited aspectsof business.
Indeed'most business-education
classes
ur. d.uot.d to specializedareasof study on
specific
functional areas,such as,fla11e or marketing.
In strategicmanagement,however,we,re
concernedwith an overall,holistic view of thJ
firm and its .nrtro'n-..rt and the waysin
which sucha view determinesthe competitivedecisions
that b"ri*sf ."pre haveto make.
For this reason'when studying strategicmanagement
we generallytake the perspectiveof
the strategicleader.Recognize,however,thai.strategies
often emergefrom bottom-up
processes
and from fortuitous circumstancesthat the leader
could ,rit hou. anticipated.
The strategicleader'sperspectivedoesnot mean to
suggestthat plans are formulated i'
some linear fashion by a singleleader.Rather,the
stratl[ic t.ua..:. f.rrpective is the holistic considerationof the businessand its environment
rather tharthe myopic fbcus on
a s i n g l ef u n c t i o n aal r e a .

W F { Ys T { J * } Y$ T R A Y S * Y ?
You may wonder why it is important to study strategywhen your
careeris unlikely to begin
at the levelof strategicleadership.From a practicaliiandpoint,
employersexpectyou to be
functionallyfluent in accounting,marketing,or someother
specialtation.l'hey alsoexpect
that you will understandthe "big picture"-strategic management
givesyou the toolsto understandand describethe big picture.If strategyis the meais by
whlch an organizationgoes
about pursuing its overarchingobjectives,then studying and gaining
an understandingof
the principles,theories'and-toolsof strategicmanagementwilibe an*important
aid fbr yoti
evenearlyin your career.This coursewill help you in severalareascritical
to your .u."..,
you will be in a better position to understandyour firm's objectives(or
what they shoulcl
be)' you will be equippedto analyzeand understandhow competitionwill
interferewith attaining your objectivesand what can be done to minimize thesethreats,you will
comprehend how effectivestrategy formulation and implementation requires comDlementarv

___-.,r_**r."*ltrr*e,

(A

J *

qe!?9!@@-@.@

10

panr oNE

strategy and strategic Leadership

in Dynamrc

Times

organrzationalresc
factorsmay be -,.'::t-t:-:"0

capabilities'and you will

be ablet. icle

rors,ra,egi;;-,",jiiiti.lffi;:,1'fi
:',.,ilt*f
f *Tlii5,ft
;ii;..,ffif

requiresrhe coordinar..l
.oop..utio;;;;p.y"es

:fi:fj.1#il:1.

at al[lel.cl.sof th
*t*, *r'"ni,..-., i; a**,n*u,'a;;,;;;r,ns
srraresy.
rheyrery

opportunities.con:j;;'.;'d;:,i'Ji:#."#'J,Tr:::xT51*1
j:*:rmi;il[:.d

they'llbeableto -ut. .ttoi.".

;;;;
.orir,r,."rrrirr,ii. iirr'-,,,.,,,,
understand
thefirm'srtrut.gyu,rdworktor,r,arcr,t ...rore,thatman_
irnprcrnenting
;iJTiff:llevel
itsstratew f F { e Y$ s s ? f t & T H & y ?
means
:tralegy lhe coorcjinaled
0yt/Jqrch
anorgatrizalj0n
pursues
ils
goalsandoblectirres.

Theidea of 'ttrategy" means,clifferent

things to different people (arcr
aren'tparticurarrvaccurate).a
a lot of-theseideas
In facr,expertsinthe fierd;";:;;i;"\;t.,i
of strategy.
uu.iou, definitions
we'veadopteg

,1. *;;ffia
0o.., a.n"lii"r, ,i.;,;
means
,, thecoordinated
bywhichanorganization
p*ru., i* go"k
thusencom_
";;;;.i,"*ii'r,..,egy

;;""""J;;J.,n.i.,.o'. edrobetaken
|iffiil,.,fi:Ifi"r?',::il
by
*tx**"
",
Becausefirms

,,[,'_",fi
gi.1!;;;1;i",".;'4i,"[T:*i.::ri#iiJiilT:"Tfi
:1iil:i]il:?;X#;
are

other potential providers

of thosep.oau.t, urraservices.
virtuall,v Jl firrns facesome
of competition' A strategy
level
helps a firm u..o*prirr, ir,
.rr;..ii.,
i., ,r.,"tu.. of competi_
tion' Strategyis not, hori,evea;.;;;;;l"r.ro-rugame in rvr.ricr.r
onc firm wins and
In many instances,firms ."";;;;
in some
rr,,rin"r. .,ra competein
n"::""rp".,, "r
Exhibit 1.3outrinesthe strategic
management.process
that 1,our'i, be exploringand
pllng throughourthis textbooki pron'
ap_
tf,. .*tbit, yo,, .",, ;;;;;rsion,
jectives'internal and external
goalsa'd obanalysis,
i.r.,r'.o,-, be used to help
formulate and implement strategy.
"na-i-pt.*.ntation
Strategy
outlinesthe meansby rvrricrra
firm intendsto
createunique value for customers
and otire, important stakehoidcrs.s
rhis definition of
strategyisimportant because,
as you will seelater,it forces
*orrug".r'u., think holistically
and d1'namicallyabout what
the n.* a".,
*r,y tt o.. u.tiuitii, ..n,rrrr,.,raly
tomersto preferthe firmt products
readcus_
""a
and serviles
over thoseof its conrpetitors.

M U 5 { r uSf f$i S T R A T E G Y
V E f tS U 5 C O R P O R A YS
f fTi $ * & ? . *Y&

In studying strategy'you'll find

it useful to distinguish betwcen
straregicissuesat the
businesslevel and those at the
corporatetrrui. sorrn firms are r".,.r.0
sharply on their
business
sttate,gy:
They competein only one o. *ry
few industrier.,lrir;. firrls compete
in
many industries'The openingvignette
on u'der Armour pai'ts a picturc
of-a fir'.r that has
a very specificcorebusiness(athtetic
apparel).Somefirmslsuch asGe'erar
Erectric(GE) or
United Technologies,
arecarhd ,ongtoirrot*b-..u,rr. they,re
so
diversified
that it,sdifficult
to pigeonholethem into any specidc
industry.
consider the two largestcompetitors
in the aircraft-engineintlustr' 'rhe
largestis General Electric(GE)' with $l l billion
in uir.ruftl.ngine salesjhe ...nn.ii rg.rt
is nols-Royce
PLC' with approximately$8.4billion
in total saies.nons-no,ycegersrn.sr
of
its revenueapproximatelyT4percen;from this
industry.(Thefirm no longer nrakes
luxury
cars;the
operationwasparceledoffto BMW and
volkswagenin lggg.) In conrrast,GE
is involvedin
hundreds of businesses,
including such diu..r" enterprises
as ma'ufacturi'g light bulbs,
medical devices,and commerciallet
engines;providing home mortqages;broadcasting
(it

fo -

C h a p t e r I : ' > I n t r o d u c i r ,S
g i r a t e c i cV a n a g e m e n t 1 1

Exhibit 1.3 The StrategicManagementprocess

owns NBC); and operatingself-storagefacilities.It deriveslessthan l0 percentof its revenue from aircraft engines.Within this industry, of course,both GE and Rolls-Royceface
the samecompetitivepressures,
suchasdetermininghow to competeagainsteachother and
suchrivalsasPratt &\A4ritney(the third-largestfirm in the industry).In managingits portfolio ofbusinesses,
GE facesstrategicissuesthat arelessrelevantto Rolls-Royce.
BUS|neSS Stfategy
What sort of issuesarethese?Businessstrategyrefersto the ways
a firm goesabout achieving its objectiveswithin a particular industry or industry segment.
In other words,one of GE'sbusinessstrategies
would be how it pursuesits objectiveswithin
the jet enginebusiness.This strategymay encompasssuchthings ashow it competesagainst
Rolls-Roycefor contractsfrom Boeingand Airbus, how it cooperateswith other suppliers
of technologyit usesin designingits engines,and the decisionto ramp up scalein an effort to reduceits costs.When Under Armour managersdecidehow to competewith Nike
for consumerdollars,they,too, are engagedin businessstrategy.Businessstrategy,therefore, focuseson achievinga firm's objectiveswithin a particular businessline.
Increasingly,businessstrategy also takes into account-the changing competitive landscapein which a firm is located.Two critical questionsthat businessstrategymust address
other companiesmay be comare (1) how the firm will achieveits objectivestoday,+'rhen
(2)
the
firm plans to competein the
how
peting to satis8/the samecustomers'needs,and
issues
related
to businessstrategy.
future. In later chapters,we'll focus specificallyon
Many firms are involved in more than one line of business.
COrporate Strategy
Largecorporationslike 3M and GE canbe involvedin dozensor hundredsof separatebusinessactivities.Under Armour startedwith a focus on men'sperformanceapparel,but has
expandedinto other apparel like footwear. Corporate strategy addressesissuesrelated to

tl_

businessstrategy iitiatsgy
l'r

r , , , r t i j . i i ; i i: i i 0 i t i l i i i i f a i S , . V i i h i f ia

i).r l:i .tl,ii l.-il:iii,;0t

illirisii'l

corporatestrategy
trr l

rt (

Strateqy

:i I if rt .t)it! iilld exil

i i . i r , , i i l i r i r i l i i i l i r s i r l t l s s e s ,i 0 r
C0flilany
iliiliililll I irii lrr-r11
;1 ;,1111,-,nt
,ri.itr r,tiiiri; ia, iird lfilila!les

lts

; : , 1 1 l i 1 ; , .1r 1 i l i l S r i l a S : l i i sa. i l l d i C i

'' :'|'lrdrio

12

pmr oNE

Strategyand strategic Leadership

in DynamicTimes

three fundamentalquestions
sassociated
' r v L r o r L u with
w r t l n:
Illanaglng

than one business:

a colllpallv tltat tlperates in

more

l' In whatbusinesses wecompete?

in the r970sand r9g0s,for i'stance,
lilr
searschose
to branchout of retailing
into crldit.-ar,la.r. brorierage,
ancl
rear
cstate.
Later,
it de_
cidedthatmanyof thesemoveswere
ilr-ua,rir.aandit dirreste.t
,ruri
of
these
new
businesses'
GEmanagers
address
corporate-strategy
questions
r,r,hen
deciciing
whether
the
firm shouldenteia newbusiness.
al ortie decisions
aboutrvhatbusr'esses
to competein (includingdecisions
to exitbusinesses)
areirru.. oilorfo.*. ,rrur.gy.
'
parent,addvalueto our variouslines
of business?
At GE,
ilil:ll#
L.;;:.n.'",e

acrossits.o*_.,.,#u#j:ffiJ#r_1,":nTJ:r"J.#Ii:::

units.UnderArmou

businesses"i;;;'"#;;iJ:,'i::'ffi
,#i::ffi1TiI:il:ll:i',?ffi
**i

materialize,will require the corporate

office to help the b.rrir-,"rr'.;;;is to work
in a co_
operativemanner.searsoncethought
that it courdprovide orc-stop shopping
at retail
outletsfor everythingfrom tools tl
life inzurance.Thus, corporatestrategy
also deals
wirh finding waysto createvalue by
having two or more ow,ed l tltusiuesses
u)t tt(:
t:ooperateand
share resources
3' How will diversification or our
entry into a.new industry help us to compete
in our
other industries? Under Armour thinks
that by enterirrgoir.,t"rii ;;;;r..,
they
may
be
betterpositio.pedto sellmore performur."
uppu..r.In additiorr,becauseNike operates
in bothmarkets, it puts th"mln a better
competitiveposition in lroth inclustries
relative to this largeincumbent.wal'Mart
has found thai divcrsificarioninto the grocery
businesssegmentof retailinghasincreased
,.,u roo, traftic anciboosteclsalesof nongrocery retail products.

Strategy F o r m u l a t i o n
and lmplementat!on

I
I

Earlierwe definedstrategyasthemeansbywhich
an organizationpursucsits goalsand obstrategyformulation process jectives.Strategy
formulation is the processof decidin"gwhat
ofdeveloping
toao; ,trut"gy lmplementa_
a strategy.
tion is the processof performing all ihe
activities n..."rru.y to ,10*lJrut lns beenplanned.s
Becauseneither can succeedwithout the other,
the two processes
are iterativea'd interdestrategyimplementation
pendentfrom the standpointthat implementation
shouldprovideinforn.rationthat is used
Process
ofexecuting
a strategy,
to periodically modify businessand corporate
strategy.our opering i.,ignettefocused
mostly on Under Armour's strategy.Howeu.r, as
the co"mpanyt o, g..-r"rr, it found that i'
order to implement this strategy,it had to invest
heavilyin o.gnniiational structure,systems,and processes.
The Under Armour examplealsoshowshow good strategies
representsolltions to complex problems'They help to solveproblemsexteinaltothe
ir- by enablingthc procluction
of goods or servicesthat bo-thtreatthe competition and
havea ready n'rarket.T'heysolve
problems internal to the firm by providing all employees,
incrutling r,f cxecutives,with
clearguidelinesasto what the firm should and snoutdnot be
doi.e.

$ T R A T n * Y p 0 R# $t i I * & Y ' Sr u
So now we know that strategyformulation meansdecidingwhat to
clo.Somestrategiesresult from rationaland methodicalplanning processes
baseJon ar.ralyses
of Soth internal resourcesand capabilitiesand the externalenvironment.Others emerge
over time ancl are

\ - -l L -

Chaptcr

ir

$
't:

4
6.
;{i
i*i
,fS,

s{.
:!&

1 )> Introducing Strategic tvtanagement

adoptedonly after an unplannedpattern of

clecision^s
or actionssuggests
that an u'folding
t9t1.*ut unexpectedlylead to an effective
strategy.sometimes the-r-ecognitionof a strategicallygood ideais accidentalor "lucky,"but
corporateinnovation and renewalareincreasingly the products of
,controlled experiments and the opportunistic exploitation clf
surprise'{.As you can seein Exhibit 1.4,dhesedifferent
.i.","gy arereferredto as
intended,deliberate,tealized',emergent,
"rp..rr "i
and unrealized.riyou
can thini<of intendedstrategyasthe ifritial plan, whereasthe realizedstrategy
is what actuallyis put in placeand succeeds'Thus, parts ofthe r-ealized,strategy
can be credited to deliberatechoicesand actions
(i'e., intendedstrategiesthat are.realizJ),
and parts are due to unplannedones (i.e.,real_
ized strategiesthat were not deliberate but nevertheless
emerged;. rirruly,
some aspectof
the_initialstrategicplan is not realizedat all, and
drops by the *"yria..
You can seethesevarious aspectsof intended and.
realized.strategy
through the experience
of Intel. During its early years,for instance,the chipmaker
Inter wls .orrr.rourty focusedon
the design and manufacture of dynamic, rundom-ucce*
*.-o.y-.ti,
tnnaus), and
through the 1970sand early 1980svirtually all of the
firm's revenue.urn. no- DRAMs. Intelt participation in the DRAM market was intentional
and planned virtually from the moment of its founding. By r9gj, however,95 percentof
the companyt revenuecamefrom the
mlcroprocessorsegmentof the industry. Ironically,Intel's participaiion
in this segmentof the
industry was not planned by senior management.Rather,
it evolvedfrom an experimental
ventureto makeprocessorsfor Busicom,a Japanese
maker of calculato...r,u"b.k";;;;;;;
unforeseenby top managementwas the faci that market demand
was shifting dramatically
from DRAMs to microprocessors.Only through the Busicom .*p..i-"rt-and
Intel,swillingnessto follow the signalsthis experiment sent them in terms
of market-demandshiftswas the firm able to dramatically changeits businessstrategy.To this
day,Intel officials give
credit for the firm's dominancein the microprocessormarket to a strategy
that emergedoiiginally from a lower-levelmanagementinitiative-one that, at the timel
wasn,t greetedwith
unanimousenthusiasm
by seniormanagement.rr

:i

Exhibit1.4 Intendedand Realized

Strateqies

t3

13

14

pAnf ONE Strategy

and StrategicLeadershipin Dynamic
Times

Youmightbemore
familiar
withRolls_
Royce's
automobiles
thanitsjetengines.
tneta(tis,however,that
Rolls-Royce
PLC
nolonger
even
makes
luxury
automobilgs.
Ihecompany,s
core.
business
isnowjetengines.Jet
engines
generate
72percent
ofitsrevenues.

since their lucky foray into the microprocessor

market, Lrtel managershaveobviously
focusedon effectivestrategiesfor
maintaini.rgih" nr-t advantages.in
the segme't while at
the sametime promoting experiments
a.rcle*|loiting surprisesiit" li *i.,rr.,,ro
keepabreast
of significant underlying market-demand
.hift..

The Strategy Diamond and the Five

Frenrentscf stneteEy

Goodstrat_
egyformulationmeansrefining the elements
of the strategy.ra
lLenieltlter,llrst of all, not to
confusepartof a strategy,-for example,
being a low-cost providcr or llrst mover in
an
industry-for strategyitself.Beinga loi-cost
provider or fi.st '.r,,.,.. 'iay lrepart of a strategy,but itt not a complete strategy.
As we noted earlier,a strategyis the meansby
which a firm rvill achier.errsgoalsand objectives.This is, of course,thi intended
strategy(referringback ro Exrribit 1.4),although
through this processmanagershave a good
.hun.. of shaf ing tl-terealizedstrategyas well.
In a for-profit firm, a businessstrategf wil
generallyaddiess"h.rvit will cornpeteagainst
its rivals and makea profit. For instance,if a-firm
hasan objecti'c ro bc ont- ol t5c top two
firms in a particular industry, this is a complex
objective.As result,il stratcgydesignedto
pursue this objectivewill consistof an integrated
iet of choices.
These.lrni."s can be categorizedasfive relatedelementsof strategyiur"d
on decisionstllat 'ranager-srnakeregarding arenas,uehicles,dffirentiators, stagiig, and.economic
logic.werctcr lo this constellation
of elements,which are..lyul to the sirai-egicmanagement
processoutlincclin Exhibit 1.3,
asthe strategydiamond.unfortunately, *"y
naive managersonly ibcus o1 one or two
such elements,often leavinglarge gapsin the overall
stratlgy. or, thc1.'ray rravealr five
pieces'but not understandhow they need to fit
together.oriiy *1.,.,' 1,,,,,huueanswersto
your questionsabout eachof these
five elementscan you determinen hetheryour strategy
is an integratedwhole; you'll also have a better idea
of the areasin u,hicir your strategy
needsto be revisedor overhauled.As Exhibit 1.5shows,
a good stratesydianond provides
answersto all five euestion5;ls
l. Arenas. Where will we be active?
2. Vehicles.How will we get there?

-/h-

O h a p t e rl

IntroducingStrategicMrnag"ment
15

3. Differentiators. How
will we win in the marketplace?
4' staging and pacing. \44'rat
win be our speedand sequence
of moves?
5. Economic logic.,How will
we obtain our returns?
Let'stake a closerlook at each
of tlese elements.
Arenas'By arenas'we mean
areasin which a firm will be
active.Decisionsabout a firrn,s
arenasmay encompassits products,
services,distribution ;;;";;;
market segments,
geographicareas,technologies,
and.*" r,.g"r
value-creationprocess.unlike vision
sratements'
which tend to be fairlygeneral,
"rthe
th?identification;f
beveryspecific:
It will clearly tell managers-hui
"*;;r;;rt
tL. n.- rioura urra ,no,rta 'o;;.;;
addition, because
firms can contract with outside
parties for everything r."^
.-pr";;;
r" manufacturing
services'the choice of arenascan
ie fairly nu..o*ty a.nrred for
some
firrns.
For example,Under Armour made
,il;;;1,

riira iftio{li{ji, servioe,

g..la
a;rsiijlrt,irilJr.jiraltrntllrl.
ltcographic
'r
,ifh.rlt,.l.tilitit0;0qy.
etc.) ilr !",/hich
a
: :I iririiraiirailirij

men,
women,
andchildren.
Histo
ricauy,
.* ;::i: ;:fr::TJr::lTTffi ;:iXi.i#;

recentlyexpandedinto Eyloge.^M"..
;.;;i;;ey_arso
targeted,r*r,'new
market seg_
ments and moved inro arhleric footwear.
rr,.i,.'in"i.
pr"lr.i,
pr#-'y
through sporting goodsstores.In addition to
theseur"rru .tjor..r, Under Armour
has entirely outsourced
the production of its products to
outsid;;;;;i;;._r,
mostly in Asia.
Vehicles vehicresare the means
for_participating
in targetedarenas.For insrance,
a firnr
that wants to go international can
tiut'ouJ..tirr. in different ways.
Under Armour
senttheir own personnelto Europe".hi.u.
to open tho.. op..utions.wal_Mart,
in recentmovesto

Exhibit1.5 TheBusiness
Strategy
Diamond
Arenas: Where will we be active
(and with how much emphasis)?
. Which productcateqories?
. Whichchannels?
. Which marketseqments?
o Which geographii areas?
.
core technologies?
. .Wl''i"lr
Which value-creatioristrategies?
Staging & pacing: What wiil
be our speed and sequence
of moves?
. Speedof expansion?
. Sequenceof initiatives?

Economic logic: How will

t
returns be obtained? +--"
. Lowest costs through scale
advantages?
. Lowest costs through scope and
replicationadvantages?
. Premiumpricesdue to
unmatchableservice?
o Premiumpricesdue to proprietary
product features?

Vehicles:How will we
get there?
o Internaldevelopment?
. Joint ventures?
. Licensing/franchising?
. Alliances?
. Acquisitions?

Differentiators:How will we win?

. lmage?
o Customization?
o Price?
. Styling?
o Productreliability?
. Speedto market?

/t-

16

panr oNE

strategy and strategic Leadership

in Dynamic Times

entercertaininternationalmarkets
(suchasArgentinaand China),
hasboth acquiredlocal
retail chainsand openednew
storeson it, o*., i,' order to g,,;,',
,rro." ,'mediate presence.
Likewise'a firm that requires
a new technologycould devel'p
ir through investmentsin
R&D. Or, it could opt toform
an ailian.e.r.,J

sessesthetecnnorogv,therebvacceler;;;;;:'i"Q:Tt::l':?l':Jiii:
resourcesand capabilities'Finally,
"tl,nt
it .ouli simplyLuy unut1r..t,,,-,,
o*n, the technology'In this case'then' the possible
vehiclesfo..nt.ri.rg a new are'a
include
acquisitions,alliances,
and organicinvestment.^d;;;;;:
differentiator Featureor
attribute
of a company,s
pioductor
(e,9..
servrce
rmage,
cust0mizafi0il,
recnnrcai
superjority,
price,
qualit,/
andreliabiljty)
thathetps
rtbeatrts
competitors
inthemafketplace,

Differentiators

A firm that understandswl

T:Tffi
:,:,:il!.i{:"dJ:iH
ffi
il,,T:l'"T*.,ff
f#ilff#ilTT'ffi
that
herp
i'*ioJo rirm
scan
b.,;..*#ilTn:iffi:in':I;: i ::,L1ffi
:i j;:ff :

mon dimensions, includin g image,

,urto,*irotlon, technnai ,uprlr,^",irr,
prtce, andquatity
and reliability' under Armout
guin, salesin the marketplacetl'rrough
both image and technical superiority' Tbyota and
Honda have done very well by proviciing
effectivecombinations of differentiators.They
sell boti i*rp"rrri.,," .o.. u,r.r cars
with high_end,high_
quality features,and many consumers
find the value that they pro'id" h".a
to match.As you
will learnlaterin this course,while
effectivestrategies
often
co'bine
ciifterentiators,
it is important to makevery specific
choicesabout whalyo.r, p.oa.,.,
o,. .".rr.. is and what it is
not' It is impossibleto be all things
to all consumers.It's difficult to i'ragine,
for instance,a
singleproducrthat boastsboth stite-of-rh;:;;;
technologya'd thc loi,r,csr
price
on the mar_
ket' Part of the problem is perceptrrul-.onrrr-ers
oft"n associaterorv quality with low
price' Part of it is practicar-leading-edge
t".nrrotogi.. ."r, ,r"rr..,. ,o a.u.top
and command higher pricesbecauseof their"uniq"u.*.
qir"fi,y.-"'
There are two critical factors i., ,.t..tirrg
",
aifferentiators:
ffi Thesedecisions mus.t
made early. Key differentiators rarely
nraterialize without sig!e
nificant up-front decisions,
and without r.utuubt.differentiators,flrms
tenclto losemarketplacebattles.
ru Identi&ing and executing
successfuldifferentiators means making
tough choices_
tradeoffs. Managerswho can't make
tough decisionsubout truJ..,rfr, often end
up try_
ing to satissrtoo broad a spectrumof
..rito*., needs;as a result,they rnaketoo
many
strategiccompromisesand executepoorly
on most dimensions.

Audi provides an example of a company

that has aligned thesetwo factors successfully' In the early 1990s,A;di *unug.,,'.ni
realized.thatits cars were perceiveclas lowquality, high-priced German automobiles-obviously
. pou. ;"r;;,o" frorn rvhich to
compete.The firm decidedthat it had to
move one way or another_up market or down
market' It had to do one of two things: (
l ) rower its costsso that its prrcrng was consis_
tent with customers'perceptionsof product
quality or (2) improu" qt,"tty sufficiently
to justifu premium pricing. Given limited
resources,the firm courclnot go in both di_
rections-that is, produce carsin both the low-price
and higrr-quality strata.Audi made
a decisionto investheavily in.quality and image;
it investedsigniricanttl,in quality programs and in refining its marketing efforts.
d, y.u., later, th-equaiity of Audi cars has
ttgnificantly, and customer perception has moved
thenr liuch closer to the
]"*.tut^t
level of BMW and Mercedes.Audi has reapedthe
benefitsof p..,r-,i.r,r.,irlcing and improved profitability, but the decisionsbehind the
strategicup-marker nrove cntailedsignificant tradeoffs.l6
Differentiatorsare what drive potential customersto
chooseone lirn's offeringsover
those of competitors.The earlier and more consistentthe
firn.ris at cleliningand driving
thesedifferentiators,the greaterthe likelihood that customers
wirl rec.srize thcm.

- l6*

Chapter

,:i
rii
.:

ir

.ii,

ii
{l

$;
.i:]'

1 >> Introducing Strategic Management

staging Stagingrefersto thetiming and paceof

strategicmoves.stagingchoicestypically reflect availableresources,
including.urh, hrr,nuncapital,and knowredge.At
what point, for ex"perhaps
ample' should Under Armour enter specificinternational
markets?
if the company
pursuesglobal opportunities too early,it may redirect
resourcesthat are neededto exploit its
existingcipportunitiesi[the u.S.And, when i l, ti*.
to expandinternationally,it is critical to
decidewhich countriestheywill enterfirsr and which .'"il
;-.
l";iorit..-or.,
asproducr
linesareexpanded,it is critical to decidewhich products
makethe most senseto enternext,and
which should be savedfor a later time. For i.rriun.e, there
are-uny por.ibl" expansionmo'es
for Under Armour in sporting goods.They havesacrificed
,o-. or *,"r. possibreopportuni_
for the time being (e.g',running shoes)in order to focus
on oth., u.tiuiti.s first (e.g.,footliel
ball cleats)'wal-Mart explicitly decidedto delayits international
movesso that it could focus
first on dominating the u.s. market, which is, after a[, the
largestretail market in the world.
Despitemixed resultsoverseas,
wal-Mart is the undisputedlead"erin glo#retailing and has
recentlyincreasedits emphasison internationalmarketsasthe
basisfo'. futu.. growth.rT
Stagingdecisionsshould be driven by several_factors:
resources,urgency,credibility, ancl
the need for early wins. Becausefew firms havethe resources
to do evJrything they,d rike to
do immediately,they usually haveto match opportunities with
availableresources.In addition, not all opportunitiesto enter .r.* u...tii are permanent;
some haveonly brief windows. In such cases,early wins and the credibility of certain
key stakeholdersmay be
necessaryto implement a strategy.
Economic Logic Most of the firms you will study in this course
are likely to be for-profit
firms' As sttch,a key objectiveof thesefirms is to earn an economic profit.
The previous four
elementsof strategyjust reviewed (arenas,vehicles,differentiators,
and staging) will only
make sensefor a for-profit firm to the extent that they combine to earn
a profit. Economic
logic is the fifth element of strategyand it refersto how the firm will earn
a profit-that is,
hoy the firm will generatepositive returns over and aboveits cost of capital.
Economic logic
isthe "fulcrum" for profit creation.Earning normal profits, of course,,eq,rir"s
a firm to meet
all of its fixed,variable,and financing costs,and achievingdesiredreturns over
the firm,s cost
of capital is a tall order for any organization.In analyziiga firm's economic logic,
think of
both costsand revenues.Sometimeseconomic logic residesprimarily on the cosf
side of the
equation.SouthwestAirlines, for example,can fly passengers
for significantly lower costsper
passengermile than any major competitor. At other times, economic logic may
rest on the
firmt ability to increasethe customer'swillingnessto pay premium pric"esfor products (in
other words, pricesthat significantly exceedthe costsof providing enirancedproducts).
When the five elementsof strategyare aligned and mutually reinforcing, the firm is generallyin a position to perform well.The discussionin the box entitled"How Would youDo
That? 1.1" demonstrateshow you would apply the strategydiamond to
|etBlue airlines.
High performance levels,however,ultirnately mean that a strategy is also being executed
well' and we now turn to strategyimplementation. It is important to note that you can apply the strategydiamond at multiple levels-at a product level (product strategy),busineis
Ievel(businessstrategy),corporatelevel(corporatestrategy),and globallevel(international
strategy).The strategydiamond will become a powerful and flexible tool in your strategic
managementand businesspolicy toolkit

S T R A T F G YI } VPI L i l M 6 r u ? A T N # E
r u- \f d
i f&
fiS
Whateverthe origin of a strategicidea,whether it was carefullyplanned from the outset
or evolvedover time by means of luck or experimentation,successfulstrategiesare dependent on effectiveimplementation.As discussedearlier in.the chapter,strategyimplementationis the processof executingthe strategy-of taking the actions that put the
strategyinto effect and ensurethat organizationaldecisionsare consistentwith it.ls The

-l+-

, : , ' : , , 1 i i t i l i J t a ii rl Ji j

staging
,-:::i

ari

economic logic
i,ri i::

[,k]iijtsLr.v

i I j,: lti:] f:|11 a Df0iit by

r r i r i i , t r r - i . i : i ifl . l : j i t a i e q y .

17

Woul,d

ft
f"J

6ru.
ffiu

o expenencehow you might

Exhibit 1.6
applythe strategydiamond,lets
constdera recententrepreneurial
1B.OO%
successstory The majorU.S.airlines
lost over$7 billionbetweenj 99g and
16.OO%
2OO2.DavidNeeleman,nowever,
14.00%
c)
confoundedthe expertswhen he
12.O0%
decidedthat despitethe industry,s
(t, 10.00%
horrendousperformance,
the time was
o 8.00%
rightto step down from his executive
J
6.O0%
positionat SouthwestAirlinesto launch
=
4.00%
a new airline.JetBluetook off on
Februaryi 1, 2000, with an inaugural
2.00%
flightbetweenNew york City'sJohn F.
o.oo%
KennedyInternational
Airportand Fort
^i\o'
Lauderdale,
Florida.Today,the airline
ns
Vs'
seryesmorethan 50 citiesaroundthe
countryand in the Caribbeanand
intendsto expandfufther.lf you follow
the financialfortunesof commercial
airlinesyou willknow that JetBluehas
obviouslydone somethingright.As
shownin Exhibit1.6, evenafter
18.00
sufferingsome recentsetbacksthat
o 17.00
haveseverelyaffectedprofitability,it is
o 16.00
o 15.00
secondonlyto SouthwestAirlinesin
14.00
profitability
g
overthe past threeyears.le
13.00
To beginapplyingthe strategydiamond = 1 2 . 0 0
to JetBlue,let'squicklyreviewJetBlue,s o 11 01 ..0000
o
vision,whichis to "bringhumanityback o 9.00
to air travel"throughproductinnovation o 8.00
= 7.00
and excellentservice.lt intendsto be a
6.00
low-fare,low-costpassengerairline
5.00
o 4.00
that provideshigh-qualitycusromer
3.00
fl
service.Usingthe strategydiamond,
o 2.00
o '1
and publicdocumentspostedat www.
o 0 .00
.00
jetblue.com,we can determrnewnat
strategyJetBluehas pursuedin order
iv
to meet its stated objective.
v_c'

performanceof
JetBlue
U.S.Airtines Market Share and profitabilitv
5.000
o.0}%6
*5.00o/o
-1O.0Oo/o

-15.OOc'/oE

-20.00%
*25.4O%
-30.00%

o
"t* s' -.ou* ,..-.o+d'^a-."

""-" ceo"
"-"
--r-

ooo"

Market Share-_+_ ROA (3 year avefaoci

U-S.Airlines Cost Structure

.d

od@

,s$

J %".a-'

bo-

r /-'
t / v\ tc)
t

...c ..""

rt-"

',r,i
In what arenas does JetBlue
compete? Managementstatesthat
the companycompetesas a lowfarecemmercialair cafrier,and
catersto underserved
but
overpriceflU.S.cities.lts mainbase
of operationsis John F.Kennedv
airportin New YorkCity,which
servesthe largesttravel market in
the country.
Whaf vehicfes does JetBlue use to
enter the arenas in which it
competes? JetBluestarled from
scratchand has achievedall of its
groMh in flightsper day through
internalgroMh. The firm could have
grownby purchasingregional
airlines,but chosenot to.
I What are ifs differentiators? price is
a big part of JetBlue'sstrategyfor
winningnew customers,but it also
wantsto developthe imagethat it is
a low-fareairlinewith high-quality
service.Althoughit offersonlyone
classof service,the levelof service
is ratherhighfor a low-fareairline.
For instance,it offersleatherseating
and individualin-seatlivesatelliteW.
Thus,JetBluestatesthat it aimsto
createa new segmentin airlinetravel
basedon value,service,and style.
a How does JetBlue's staging-the
speed of its expansionand the
sequence of its grovvth initiativesreflect its timetable for achieving
its objectives?JetBluehas grown
from 1 route between 2 citiesto
routesthat seryemorethan 50 cities
in just 7 years.At first,it limiteditself
to the EastCoast(betweenits JFK
home baseand destinationsin
Floridaand upstateNew York),but it
soon proceededwestward,
establishing
locationsin the west.
Expansionin the east has filledin
manvmorecities,and destinations

When
former
5outhwest
Airlines
employee
andJetBlue
founder
David
(shown
Neeleman
aplane)
thathewas
evacuuming announced
launching
a newairline
people
company,
were
aghast.
Although
theairline
industry
asa
jetBlue
whole
islosing
money,
hasfound
a
waytoprosper
byeffectively
aligning
thefive
elements
0fitsstrateqy
thatisbothinternally
c0nsistent
dndexternally
generates
great
market
demand.The
strategy
includes
lowfarebutupscale
service,complete
withleather
seats
andsatellile
TV

in the Caribbeanwerealso added.

JetBluehas targetedmore citiesfor
futureexpansion.
ffi What'sthe economic logic of
JetBlue's strategy? JetBlue's
Incomestatementsshowthat its
costsaresignificantly
lowerthan
industryaverages.Indeed,in 2006
JetBluehadthe lowestcosts per
airlineseatmileof any majorairline
(withSouthwesta closesecond).
Thesecost advantagesappearto
come from an ability to perform key
fasks rn ways that are fundamentally
/essexpensrVe
than those of
competitors.By flyingonlyone make
of aircraftthat is relativelyfuel
efficient,
JetBluealsokeeps
maintenance
and trainingcosts
down.By securinga homebaseat
JFK at a timewhenthe NewYork
Port Authoritywas anxiousto attract
more air traffic,JetBluesecuredlower

t3_

airporttees.Locatingin secondary
locations(LongBeachinsteadof Los
AngelesInternational
Airporl,Forl
Lauderdale
insteadof lViami)also
-averageairport
meanslower,than
fees.On the rcvenueside,although
JetBlueoffersverylow fares,it wins
customerslrorr c--onrpetitors
and
usesits low-costincentiveas a
meansto convennon-fliers
to
JetBluecustorners.
lt hasalso
attractecl
customersby concentrating
on underserved,
high pricedroutes.
As a result,it now boaststhe highest
loadfactorof any rriqorairline.
As you can see,walkingthrough
JetBlue'sstrategydiamondhelps
illustrate
its slraleqi.l lrc planlooks
sound,but whai is requiredto
implement
suclr:r plan?The next
sectionsof this chapterprovidean
overviewof this criticalissue.

20

pmr

oNE

Strategy and Strategic Leadership

in Dynamic Times

processof impleme'tation also

encompasses
the refi'emer,1,or c]ran{:e,
of.a strategyas

through
earlv
impleme'rar;.,u 'rhegoar
ofimil:tr Trt"Ttrl.}:';li1'"vailable
"ir,,,r,
ffi To makesurethat strategy
formulatio'is

comprehensiveancrrve, irtorrncd
m ro tianslategood ideas
into actionsthat can be executecr
(ar<i so.ictirnesto useexecu*
tion to generateor identif, good
ideas)
In sports'a coach'splay-calling
is.only asgood asthe excellence*,ith
r,vhichthc playersexecuteit' Likewisein business:
The valueof u fr.-t strategyis a.i.r,rrr".i
Lrvrtsability to carry
tt out"'Any strategy,"saysMichael
Porter,o.r. oitrr. p..iminent wfirers
on
the subject,.... . is
onlyasgoodasits execution."2.Adds
peterDrucker,
orr. orou. nr.r.ilr.irir,. *.iters on man_
agement:"The important decisions,
the decisionsthat really 'rartcr, are
strategic.. . . [But]
more important and more difficult
is to make.ff..ti.,,. the course,;;.;;r,
decidecr
upon.,,2l
strategyimplementation
is usuallystudieJinu.rrrn.r, schoolgracluate
courses,
and
it,sthe
subjectof hundredsof booksin business
schoollibrari.r. w" au,rlti,r*,ra ,,, supprant
the
resultsof all of this study,
w1 do want y.r ;;;*,
on the i'rplicarior.rs.,r a very basicfact:
lut
'f
*i n*.fii imptementatiin
arcirrcxtricabty
I!:
!,,::,:": of;trutrsr
rinked.
rhe
!;1?y::r"
nve elements
strategv,
for instance,are related to t ott-rfornrulation
a'd
impiementation.
Good implementation'meansthat an
organizationcoordinatesresourcesand
capabilitiesand
usesstructure,systems,processes,
and strategicleadershipto tra'slate n.i"tit,".ut.
rtrategyinto
a reakzedstrategyand to positivebottom-liie
results.Throughout ;: i;; rvehelp you to
see
the relationshipbetweenformulation
u"a mfr"-.ntation. chapter 2 int*rduces
you
to
the
role of strategicleadership'and chapter
t I drills Jown much deeperinto .ur i,rplernentation
fiamework.At this point, and.in o1de1to
rr"tp fo,r^.onsiderthe con.rprcxityof imprementing
a
strategy'we introduce you to just the basic
ideasof strategicleadershipand irr.rpleme'tation.
To implement strategies'organization
leadershave-n.,me.ousle.vcrsat their clisposal.
The framework summarizing theselevers
is shown in Exhibit I.7.:r \vc categorizethese
leversinto threebroad categories:(l) organization
structure,(2) systerns
a,t7 processes,
and.
(3) peopleand rewards.The strategist
useJthesetoolsto t.rt rn. niii.,n,t-nr,ivhic6 is the
need
for all of the firm's activities to co-rnplement
eachother and sul4rort trr. ,t..t.eo,.

Exhibit1.7
lmplementation
Framework

lmplementationLevers
r Organizational
structure
. Systemsandprocesses
. Peopleandrewards

Strategic Leadership
. Lever-andresource-allocation
decisions
. Developsupportamongstakeholders

- 20*

C h a p t e r 1 > ) _ I n t r o d u c i n gS t r a t e g i c
Management

In addition' strategicleadershipengages
in a few activitiesrelatedto implernenting
the
strategythat are unique to their positiln'at
authority. e. tn.
r,,gg..,r, implementation includesthe activitiescarriei
out by the organizationthat"*rriuii
areaimedat executinga particular strategy'often, the strategythut
i. ,.utir.a through theseimplementation
efforts are
somewhatdifferent from the origi.rut
plan. IJeaily, thesl deviatio;:;;_
the
originar
plan
are a result of explicit alterations of th.
,t.ut.gy that result f.o* r..aiu.k during
early implementation efforts as well as from
the .*pioitatio' of serendipitous opportunities
that
were not anticipatedwhen the strategy
was formulated.
organization
Structure
structure is the manner in which responsibilities,
tasks,
and peopleareorganized'It includesthe
organization'sauthority, hierarchy,units,
divi.sions,
and coordinating mechanisms.At this poirit,
we just need to ,.rnirrd ourr.lu", of a
few key
questionsthat managersmust consideiwhen
imllementi"g u ,trut.gy,
m Is the current structure appropriate
for the intended strategy?
x Are reporting relationships and
the delegationofauthority set up to execute
the strategic plan?
n Is the organization too centralized (or
decentr

alized)for the strategy?

Systems and Processes

systemsare a' the organizationalprocesses
and procedures used.in daily operations. otviously,
these include control and incentive systems,
resource-allocationprocedures,information
systems,budgeting, distribution, and so forth.
People and Rewards
rhe peopteand rewardsreverof the model underscores
the importance of using all of the organizationt members
to implement a strategy.Regardlessof
your strategy,at the end,of tfe.dar, itt your peopre
who wili rrur,.i-pi.-"nted
it. competi_
tive advantageis generallytied to your human'resources.23
Successfulimplementation dependson havingthe right peopreand then developing
and training them in waysthat support
the firm's strategy.In addition, rewards-how you pay
your people-can acceleratethe im_
plementation of your strategyor undermine ii. we
harreall-seeninstancesin which unintendedconsequences
happenbecausea managerrewards'A,whilehoping for..B.,,2a

S T R A T F G I {I " S A D H & $ f f i i P
Strategicleadershipplays two critical roles in successfulstrategy
implementation, and it is
important to highlight them here so that you can incorporate"th.i.rro your own assessment of a strategy'sfeasibility as well as ensurethat you include
theseroles in your implementation plans. Specifically,as will be discussedin greater
detail in Chapter ll, strategic
leadershipis responsiblefor (1) making substantiveimplementation
lever and resourceallocation decisions and (2) developing support for the strategy
from key stakeholders.
Kevin Plank at Under Armour obviously spendsa lot of time Jeciding
what needsto be
done, such as which new products to launch next, which markets to
enier, and which suppliers and distributors to ''se.However,he also spendsa significant
amount of time talking
to analystsat largeu.S. brokeragefirms, mutual funds, and pension funds.
why? Becauseh!
must keepthesekey financial stakeholdersand shareholdersabreastof what
Under Armour
is doing so that they retain confidencein the firm.
A successfulstrategyis not generallyformulated just by a single person
or a small
group ofleaders.Strategicleadershiprequiresinvolving the right p.opi. in critical
decisionsbecausekey information may be widely dispersedwithin the firm. In addition, successfulstrategyimplementation requires activeleadershipto ensurethat what emerges
and what is realizedare desirableand that neededchangesof courseare detectedbefore
it is too late.

21

22

paet oNE

strategy and strategic Leadership

in Dynamrc Times

What ls Competiti;e eduantag*,,

Earlier we defined str:tec!

the means by which a fir'

u,ill

achier.erts objectives.we
ord. ?s
business
or..o1i3y,irsobjectivcs
*,ill
encompass
l""f..J#:J:rl#,i successfulat sellingproducts
se'erauy
or ser'ict's t. customers.Because
vir-

tually ill firms face,8

jec
tive
s,"a,-*l'
i:r:l".T#ff ::;Tf,,j;.:I :ff**,j: *fil., .;T;
competition'
iTi::
Thus,the
conceptof str"r.gy ,rgg.rts

a rerationsrripbcliveenstrategyon
one hand and performanceand
the
.o-p.rIri r. advantageo' th" ,ltir.r.
specifically,we ex_
plained that a strategy.encompasses
the pattern of aciions take, b1..
a firm to achieveits

:l**:,lfi::ilff"l:{;;;

;i;;;; .o,'.r.,,,o'',
i'i.,,.,,'i,,.,
orstrategic
man-

iveadvantage;;;,;:i^i?'*.ffi:t::,:ii;!:#;,,::,:,:'*,:,:;!K,,:

competitiveadvantage A
irrlls abiiily
jna wav
tocreale
value
thatitsrivalscannot

Firms prefer torbewinners in their

respe.ti?" industries.oth., tlr,r,,,ubpar
or evenaverageperformers.This leadsus to
define competitive advantage., : ;;,rr,,
ablity
to create
valuein a way that its rivals cannot.
Performanceitself'however,is not
competitiveadvantage;
it's lnerelva resultof it. A firm
may achieverelativelyhigh short-term
p.rfo.-un.. levels without g:rining
any substantial
advantageover irs tt""I:y"tg.
,h. ;;;p;r;st
had an unusuarv good vear or took dras_
tic measuresto cut costs(perhaps
to .rrrr,rriainubryrow le'els). Ir,,;h;
,u-. token,a firm
may enjoy significantcompetitiveadvantage
r" r"-. ri".J;i ;;r,;;.. bur srill perform
more poorly than its competitorsbecause
oi other urd.rp.rf*r.Jg'iurur.r.
units or be_
causeit choosesto keeppriceslower
than its competitiveposition n ould otherwise
allow
For instance'a firm with a competitive
uduuntug"may desireto gain additional
market
share'Alternatively,it may keepp.i..,
to*.. trranits competitiveposition would
otherwise
allow to avoid regulatorr''o, .o-^*p.titors,
uii.rrtlorr.
The qrlestion that we now want to answer
is: wy are sonteJirms abLeto achievegreater
advantagesover rivals than other
firms? Ailfi.*, ure not arike.For man1,1,cars,Delr, for ex_
ample, seemedto have some capabilities
that;,h.;;;;;.-"r,".rrr*.turers,
such as
Hewlett-Packardand IBM, wereunable to
duplicate.Thus, for lnanv ycarsDell sustained
a
competitiveadvantagewhich.only recently
muy haveb.;;';;;;;;r.aiv
u.*r.tt-packard
and IBM' Toyotaenjoysasimilar advantage
in the automotiveind,stf l' someindustries,
we seenew entrantsquicklyoutmaneuver
incumbents.For insta'ce,l,r.hyhasunder Armour
been ableto enter an industry with some
veraformidable incun.rbentiana still be ableto
earn very $ood profits?Most industries are
n'otaccuratelycharacterizedby the theoretical
condition of perfectcompetition that you likely
learnedabout i' nricro ccononics(i.e.,in
perfectcornpetitionfirms can only earn"normal"
profits becausesupernorr.nalprofits will
attract new entrantsand this additional competition
will drive profits clorvn).In reality,
manyindustrieshaveone or more colnpaniesthat
earnmore than "normal,,profitsfor many
years'In addition,somefirms appearto outperform
competitorsconsistently,
which is likely
an i4dication that they havesome form of competitive
advantageou.. ,h"r. rir.als.As we will
see'however'it's becomeincreasinglydifficult io,
urryon. firrnto sustaina competitiveadvantageover a long period of time.26

M S Y X fEt SI h X S . T TO
$ F C O MP F T I T I V HA f f W
i A r u T &J#l i
Thefield of strategicmanagement
0n explanationsfor contpetitivcadvantage-ot the
focuses
reasonswhy companiesexperienceabove- und b.lo*-.rormal
rates of returns. In other
words,strategicmanagementofferstheoriesand models
that help us uncicrstandwhy some
firms perform betterthan others,and more to the point,
offersnranacerstools to help their

-72-

C h a p t e r 1 > > I n t r o d u c i n sS r r a t e g i cM a n a g e m e n t
23

firm-obtain a competitiv-e.advantage
and perform better than the competition. Generally
speaking,as summarizedin Exhibit r.g, there are three
primaryp.rrp..tir... on this issue
(perspectives
that, as we shallsee,reflectcontrastingbri.o-pt.-.rro.y
points of view):
m Th: internal perspectivefocuseson resources
and capabilitiesas internal sourcesof
uniqubnessthat allow firms to beat the competition.
ffi The externalperspectivefocuseson the structure
of industries and the ways in which
firms can position themselveswithin them for competitive advantage.
n Tlre dynamicperspectiue,whichbridges the internal
and external perspectives,is a third
view of competitive advantage.This view helps explain why competitive
advantagesdo
not typicallylast over long periodsof time.
Let'sexamineeachof theseperspectives,
or theories,more closely.
The. Internal Perspective
The first of the two fundamentalperspectrves
on competitive advantageis an internal one. It is often cailed the ,rrourrr-iorri
view of thefirm.
Thisperspectivesuggests
that no two firms areidenticalbecausethey possess
resourcesand
capabilitiesof different qualities. The advantagegoesto the firms wiih s,-rpeno,
resources
and capabilities.Proponentsofthis theory arguethat a firm gainsan advantageby
obtaining valuableand rare resourcesand developingthe capabiiity to utilize these resources
to drive customerstoward their products and servicesai the expenseof competitors.As a
result, firms with superior resourcesand capabilitiesenjoy competitive advantageover
other firms.27This advantagemakes it relatively easierfor these firms to achieveconsistently higher levelsof performancethan competitors.Competitive advantage,therefore,
ariseswhen a company'sresourcesallow its products,services,or businesses
to compete

Exhibit 1.8 ThreePerspectives

on CompetitiveAdvantage

:->

-_72

------)

24

pmt

ONE Strategy anctStrategic Leadership

in Dynamic

Times

successfully
againstrival firms in the sameindustnes.
Accordingto this perspective,
the objectivefor managersis to determine
what resourcesand .apnb;'iitie.s
olfer tire most potential value'to acquirethem ifthey-are lacking,
and then to reveragcthosespecilicresources
in executingthe firm's strategy.The resourci-based
view alsoh,,tc1s
that a firm,s bundle of
resourcesmay either hinder or help its
entry into new busirresses-,r,ricleathat we,ll
explore further in later chapters.zs
The External Ferspective
rhe secondfundamental pc-rspectrve
o' competitive
advantagecontendsthat variationsin firms'competitive
advantager
and performanceare
primarilya function of industry attractiveness
anithe positio, nI,ll.,n, *,it.hinthe industry
relativeto competitort'Tl".: this external
perspectivesuggests
that compctiti'e advantage
comesfrom a firmt positioningwithin the
competitivebusinessc^,iror.r'ent.
The seminalwork supportingthis upprou.h
is Michaerporter,srvorkon competitive
strategy'2ePorter's theory-sometimes called
industrial organization eronomtcs(I/o
economics)-suggeststhat firms should do one
of two thlngs: 11) position themselvesto
competein attractiveindustriesor (2) adopt strategies
that wili niakctheir currentindustries
more attractive'In somecountries,for instance,
carmakerslobby fbr import tarift'sin order
to make their domestic markets more attractive.\A/hen
th. ,tr.t.g1. ,..,,,.Lr,tt accessof foreign manufacturersto the market is limited, and
the costof parti"Jipatingrn it" is higher.(In
later chapters,we'll explorein more detail the theoretical
mocielsancltools that help managersanalyze,understand,and shapea firm's competitive
enviror'ne'ts. )
The Dynamic Perspective
In addition, the two funclanrentalperspectives
that focus on internal and externaldeterminantsof competitiv"
ud.runtog.,some inclustriesor
market segmentsarelessstablethan others.Not surprisingly,
cor.npctitive
advantageis more
likely to endure in stablemarkets than in unstable*.r.
ionu..r.iy, th. competitive advantage held by one firm over another tends to changevery
slowly ir stirblemarkets but more
quickly in unstableones.As a resultof current or possibiefuture
changes in the comDetitive
e.nvironment,
strategies
needto be dynamicin natur".The gre.rtcrrr,i rl.gr..
i;
the environment'the greaterwill needbe the dynamismof the stratesv.
"i.h;;;;
The globalchocolateindustry,for example,is a relativelyrtrl,l..uuiro,rrnent
because
a
fs\ / fi1rns-notably, M&M/Mars, Nestl6,and Hershey- dominate it in
tcrms of both size
and brands.In addition, demandfor chocolateis relaiivelystable,grorving
with population
growth. To stimulate growth, large companiestry to formulate ,-,.,rv
candy bars-.However,
this type of growth is rather incremental and predictable.Sinallcr conrparlles
carve out
nichesin which to offer differentiated products, but this generallydocsnot result
in any significant upheavalof marketposition.In suchstablecontexts,funciamentaltheories
of competitiveadvantageusuallyexplainmost economicfacts.The external(or positional)
view of
strategytends to dominate questionsof strategyformulation ancl inrplementation.
Why?
Because
a firm's current market position,asgaugedby marketshareor sonreother criterion,
may be a good indicator of competitiveadvantageand providesa relativelyaccuratepredictor of future performance.This view alsotendsto assumethat industriesareclearlydefined.
that competition is predictable,and that the f'uturedoesn'thord nra'1,sr-rr.pri565.
Rut what about dynamic industries-such as computer chips or lase-rprinters or medical products-in which it seemsthat competitive advantagecan shift in a matter of
months or evendayssimply becauseof a new product releaseor somc other technological
breakthrough?30
A so-calleddynamicperspective
on competitiveadvantagchasbecomeincreasinglyimportant in explainingthe economicfactsin suchindustriesin which markets
converge,technologiesrapidly changecompetitiveconditions,capitalmarkctsbecomeincreasinglyimpatient, firms competein multiple marketsand rnulriplc industriesagainst
common rivals,and the costsof establishinga competitiveposition soar (and so increase

*z\-

Chapter I

- , I n t r o d u c j n oS t r a t c g i c
Management

dramaticallythe cost of failure).

The dynamic perspectivesuggests
that a flrm,s currcrl
advantage ilLs
notan accuratepie<iictorof future
perfirr,
ffi:#:::ffi;:"*o.titivc

serrisnot".;;;il:'".'::l'.'ffi:Iil,ffi
HI::Tff
:::;::l*fuI*::#i

congequently,as th"ecompetitive
ervironment changer,
l;;;;.
-uy u" past leaders,
new entrants'or prior incumbents
""*
who arebetterpositioned
for
the
future
stateof thc in
dustry'From the dynamicperspective,
r" toot to the pastf- .;;;;""t
how the firm ar
rived at its current position u,td
to tn. ruiu.. in an effort to predict
the look of the '.r,
competitivelandscape.
The Externar Dimension of the
Dynamic perspective of course,
the dynamic stratcg'
perspectivehasboth externaland internal
dimensionsaswelr.on the external
side,it,s useful in analyzing"high-velocity"mark.ts-markets
thar
.t;;J;;
rapidry
and unpre_
dictably':t often, such changes.erurt
"..
f.om t*rrq"r"g| ;;;
#."d
the
personal
music
player marker has seenrremendous
upheavalin th. ,iutus q;;;;rd
formats
replaced
analog devices.However,aswe noted
earlier,tn*. u.. ,rliil;;i.""tributing
factors.
The dynamic perspectiveis also a
good tool for examining industries
characterized
br,.
multimarket competition-those in ,irri.rr
nr-, tend to encoi.rnterthe samerivals
in
m'l
tiple markets.32
Goody.ear,
Michelin, and Bridgestone,for instance,
competehead_to_heacJ
in tire markets around the world. Another
rorl or -utti-".k.;;;;;edtion
is ilustratecl
by Nestl. and Mars; thesecompani.s
buttle li out in global industriesranging
from per
foods to snackfoods and will oft.n .,."
..ro.,*., from one industry to bolster
competitivcposition in another-s:y, by offering
retailerd1co11ts
exchangefor.sherf
il;;ll;
spacefor snackfoods.For instance,Froctor
& Gamble,s""
entry into vi;;""- appearsto bc
lessdriven by the profit motive (p&G tends
to losemoney o' vi"irru-.se soapsares)
than
by a determinationto keeprival unilever in
check.If p&i had not enteredthe vietnamese
market,UnilevercourdhavereapedmonoporyJike
profits
to usethe win.fall to pay for competitive efforts ugurnst p&G
in other""d;;;;;d
markets. By competing with
Unilever in a market in which it hasnolompetitive
advantagefuni *uy rrot evenseeko'e),
P&G's strategyreducesUn'evert ability to'wage
war on other fronts.
The Internal Dimension of the Dynamic Perspective
The dynamicperspectivecan also
help us to focus on a firm,s resourcesand
capabilities,particulu.fyiiror" that lead to a
continuousllow of advantages
in resourcesor market position and those tlrat
strengthenthe
firm's ability to embrace (and even foster) continuous
and sometimes disruptive change.
Risk taking, experimentation, improvisation, and
continuous t.u.rrir.g are-at least from
the dynamic perspective-key feaiuresof successful
firms. Later in theiext, we will explore
severalrelevant analltical tools for shaping strategy
formulation. you'll also learn how tcr
combine your analysisof an industry's cumirlativetechnological
clevelopme't with your assessmentof whether a firm can exploit an innovative
prodrl.t or disruptive technology
through its entire life cycle or whether it must instead
leap fro- p.ocu.t to product at
strategicallydefinedcrossoverpoints.
As suggestedby our opening vignette on under Armour,
note that the dynamic perspec_
tive also provides valuableinsight into the formulation and
impleme.rtuiion of strategiesat
firms competing in ostensibly stable markets and industrier.
F.* ob..ru.rs classifiedthe
men's athletic apparelmarket as a dynamic industry. while
there were many competitors i'
various segments,Nike wasviewed asthe Goliath of the industry
that leclmuch of the innovation of new products' Under Armour enteredthe industry
witl an innovatlve product targetedat an underservedmarket. Under Armourt compression
performance wear products
*"1:
to generatesignificant price premiums over incumbenis'products (remember,g25
{].
to $35for a T-shirt).yet,while the creationand designof the
conceptwasproprietaryto un_
derArmour, they usedoff-the-shelf technologyfrom third-party suppliers.
consequentry,in

- L5-

25

26

penr oNE

strategy and strategic Leadership

in DynamicTimes

order to successfully
enterand capitalizeon his idea,
Kevin Plarrlincecjccl
to be ableto mar_
shalorganizatt:lit-1*:tt:,ts to
implemart his plan and goin ,-,,,.n
., sharebcforehe awoke
the giant incumbents'By the time
und., Armour upp"*.a n,.,N;t..,,
ancladiclas,radar,
had alreadycreatedand was in position
it
to defenda rather clon
formance

apparel
you;1ft;; thesame
segment.
,r,.-".i,,,i.,,-:|'',ll].liT:l,ljl,'j].:H
H_
versus

susBarnes& Noble ind U.S.-i"i_-iii,

major steelprotluccrs.,.,

.\l s*&,n"r-$"ai_4ffii"
r f,a-e?31 n* *'r.6r q_Jg f,-tfu ^ T $ ^
&-r
y "*ff L*E3ffigg#y3
{y#"q
ryF&& *o
*.ffpq&*-6*}l

J
I' understand what strategyis and
identfu the dffirence between
business-Ievelandcorporate-leu't't'ot'iy'
sta;;g'ic-management
is the processby which a firm manage'int
ro'-Jtntio.r u.rd i.nplementationof its strategy'A strategy
is the central,integrated,
externallyoriented conceptof how a fiim
will achieveits objectives' Strategiestypically take one of tlvo
forms: businessstrategy
or corPoratestrategy'The objectiveof a business
strategy,isto spell
out how the firm plans to compete'This plan
integrates-choices
regarding arenas(where the firm will be active),
vehicles(how it will
get there)'differentiators(how it will win),
staging(the speedand
sequenceof its moves)'and economiclogic (how
it obtainsits returns)' The objectiveof corporatestrategy
is to spell out which
businesses
a firm will competein' how ownership bi the
corporate
parentaddsvaluetothebusiness'andhowthisparticulardiversification approachhelps each businesscompete

in its respective

markets.
2. Understandwhy we study strategicmanagement.
It should be
clear to you by now that strategic managementis
concernedwith
firm performance. Strategic management holds clues
as to why
firms survive when performance suffers.Strategyhelps
you ro un_
derstandwhich activities are important and why and how
a plan,
absentgood execution,is perhapsonly asvaluableasthe paper
it,s
printed on.
3. Understand the relationship between strategy formulation
and
implementation, Strategyformulation is the determination
of
what the firm is going to do; strategyimplementation is how
the
firm goes about doing it. These trvo facets of strategy are linked
and interdependent.This interdependenceis made strikingly clear
by the strategicmanagement process(Exhibit 1.3) you are intro:duced to in this chapter, examples throughout the text, and the

4. Describe the d.eterminantsof compettrivr:

'dvantage. competitiveadvantagcisrealizedwheuoncfirrrcreatcsvarucinwaysthat
ir, ."-p"ri,"., cannot,such that the firrn
clcarlyperformsbetter
than its competitors.Advantageis 'o1 sinrprv
higher relativeperformance; rather, superio, pJ.f,,.r.,,0n."
srgnalsthc al>ilityof a
firm to do things in ways its clirect c.'petrrors
cannot. The two
primary views of competitive aci'antaqc_.u.iternal
and external_
ur" .o-pr.-.rtary
and togethcr are usecrt. hclp tbr'rulate effecti r. ,t."'t"gi.r. The internal vi.t,
'orrrar.s cron.]petiti'eadvantage
to be a function of unique, firni-specificrcsources
and capab'ities.The externalview holds that a firnr,spcrfbr'rance
is rargeiya
function of its position in a particular indus1r1,
or industry segment given the overall structure of thc ircrusl.r profitable
industries Je consideredattractive,ancr{herefore,
high firm performanceis attributed to a firm's position rn trreindustry
relativeto
the characteristics
of the industry or irrlustrl, scgment.
5. Recognizethe dffirence betweenthe fundamental
anrldynamic
views of competitive advantage. .l.l-rctrvo fiurclamental
views of
competitiveadvantageare chartrcterizcdbv a largelv
internal or
external orientation toward cornpctitive atlvantage,research
showsthat few firms persistin their clor-r.rinancc
over competitors
over prolongedperiods of time. i-or r.r.rosl
flrnts, therefbre,competitive advantageis considereclto bc lcrlporar,u T.he
dynamic
perspectiveassumesthat a firm's current rnarkctposition is not
an
aacuratepredictorof future perforntancehecauseposition itself
is
not a competitive advantage.lnstearl,the tl,vnanticperspective
looks at the pastfor cluesabout horv thc llrnr arrivedar lrs present
position and to the future to divine rvhat tht: nerv cornpetitive
landscapemight look like. It aiso holclsth;rt it's possiblefor the
firm to influencethe future stateof th{ conrpetitivclandscape.

specifictreatment of implementation leversin Chapter I l.

*2b --

Chapier

[ ,

Fi

Introdlrcjng Strategic Management

27

R e v i e wQ u e s t f o * s
1. \{hat is strategicmanagement?
2. \44rat are the key components
of the strategic management
process?
3. Horv doesbusinessstrategy
differ

from corporate strategy?

4. What is the relationshipbetween

strategyformulation and
strategyimplementation?

6 . What are the internalanclcrlt,rrral

perspectiycs
of competrtivc advantage?
\\4tatarethe fundamentirl
urrtjdvnirrtric
pcrspeclives
of.com_
petitiveadvantage?
B. \Athyshouldyou studystratcsit
rnarrage
rncr.rt?

5. What five elements r:omprise

the strategy formulation
diamond?

E x p e r i e n t i aActivities
t
Grcup ffixerci**s
i. Identifr the characteristicsof a firm
that the membersof your
group would like to work for and try
to identi$, an exampleof
this type of firm. Whatt the difference
b.r*..r, busrnessand
corporarestrategyat this firm? How might
that affectyour ex_
penencesand opportunities in that organization?
Use your
knowledge of the firmt strategy to construct
a high_impact
job application cover letter ro apply
for a job with this firm.
2. How is internationalexpansionrelated
to businessand cor_
porate strategy?Identi$r a firm that may
be thinking of ex_
panding into new international markets.
Apply the staging
element of the strategy diamond to the firmt
international
expansion opportunities or plans. Which markets
should it
target first and why?

Go to Warren Buffett Letter to Shareholder,s

page at www.
berkshirehathaway.com/letters/letters.html
anJ read the
most recentietter.How many of the strategytopics covered
in this chapterare referencedin the letter?pick one of the
businesses
owned by BerkshireHathawayand draft a strat_
egyformulation diamond similar to the one outlined in the
JetBlueexample in the box entitled ,.How Would you Do
That?1.1."
2. Go back to the discussionof JetBluein the box entitled'.How
Would YozDo That? t.l." Use the strategyimplementation

ffithi*ai [3*h.eltes
1. Shouldethicsbe a forrnalanrl erplicir
part of strategyfor_
mulation and impiementation?\\,hat
ivould you do to
achieverhis type of objective?
2. For manyofthe firms yor: rvill srrrtlvin
this class,competitive
advantageis measuredtry sonrc {irrnr of tlnancial
profitabil_
ity. How should you evtrluatcc.thiciriciroices
in terms of ac_
counting costsand benefits?

model in Exhibit I.7 to identifi,n,hat n,ould be neccssary

to
successfuilyimplement ]etBiue's strategr..F.lowr,vouldthe implementation levers be different 1br ]etl3lrre than for some
of
the major airlines?
Go on to seeHow Would you I)o 'l'hot ar tttrsr.ltrt,rilroll.cont/
carpenlerd>sanders

-v
L1--

28

paat oNE

strategy and strategic Leadership

in DynamrcTimes

Endnotes
1. Under Armour, Inc., 2006
Annual

Report.
2. Under Armou r, Inc., 2006
Annual Report.
3. J. pfeffer and R. I. Sunl:,
T!:.Kno.wtng Doiig Gap: How
Smart ComOof
* owl

::: rffri,

edge i nto acrton 1Bos?o

n:'u.u.'ulrra,
s,,,i.,"ssSchool

,,What
:i-X.0o.,..

Is Strategy?,,
Haryard BusinessReview 74:6(1996),

5' D. c. Hambrick and w.

I.
Fredrickson,.Are you sure you
Have a strat_
egy?"Academyof Management
Exer"ri* ti,i1)6it;,;;_;r.
6. K. R. Andrews,The Con,
ceptofcorporate strategy3tded. (Homewood,
IL: Irwin, 19g7).
7' Adapted from D. c. Hambrick
and J.w. Fredrickson,.Are you
Sureyou
Have a Strategy?',Academyof irra"sr^rr;E;;;;;;;;
;'i,i' (roor), ns_rg.
8. R. H. Waterman, T. I. peter^s,-and phillips,..Structure
J. R.
'
nization,"Basiness
" " Is Not Orga_
Horizons23:3( t980), l;;;l
l#i'r"#i

The Conceptof Corporate Strategy

3rded. (Hornewood, rL:

I 0. S. Brown and K. Eisenhardt

, Competingon the Etlge lBoston:Harvard
BusinessSchool press, tee8);_R.
A B;.s.fi;,,';;fi::;r;.r,
rnside Corporate Innoration (Newyork: pr"e press,"tggo) --* "' -ry
Il. Adapted from H. Mintzberg,,.The
Strategy Concept l: Five ps for
Strategy" California Managemenl Reyiew
30:I (;;StL^il j;.
12. R. A. Burgelman, ..Fading Memories: process
A
Theory of Strategic

i"XT;i:il:i'ramic

Environm ;' A;;; ; i;;t;i\i:i

quo,t,,tv
""6
"n,,

13' Burgelman, "Fading Memories";

Grove,

onry the paranoid survive.

14. This section draws extensivelyfrom
Hambrick and Fredrickson,,.Are
You SureYou Have a Strategy?"
15. Adapted from D. C. Hambrick and
/. W. Fredrickson,..Areyou Sureyou

Havea Strategy?"
Academy
ofMa"og"ir"r nrri'iiiriniroorl,

nu_rn.

I 6. Personalinterviews with company

executives.
17. T. Carl,'After Growing on Small Towns,
Wal_Mart Looks to World for
More Expansion,"Associaiedpre* N"*.*ii"r,
M";';;;;r.
t 8. TheStrategyExecutionImpefative:
practices lmplementing
for
-Leading
St.rategic
Initiative (Washington, o.c.: Corpora'te
E;;i;;
Board, 200i);
Christensen,"Making Stratigy.,'

19. Data obtained

fron.r
wu.r.",.
unl
ol,,
iifi;i,
J;,,Jl,lli ^ll li1l,,,
l,i{lll:,,,,,,,:l:ff
reau of Tiansportation,Transitats;J,
Tl,;:l
l?tJ,,rr..:,
.,-,",;,,;;,;;;i",r.bts.gov.
20. M. F. Portet "Knolvyour place:
ILrrl l9.,\sscssthc Attractiveness
YourInduslryandYourCompan,v,s
of
l)osi{irin
i n 1 1 , , . l r r . , S t l r t e n t bl 9e9r l , 9 0 .
ThePracticettf t\Tttnst'rttttrt
iN.v \irrk: Harpercollins,
iirrl,lr?:$:r'
22. Adaptedfrom D. Hambrick
anrl A. Cannelh,.,srrategyImplementa_

tl;irl:;:l#ce

andselling,"
A,,,,,1,1,,'u",,'tr^'iu,,,i;;:,::,,
Executive
3:4

23. See/. B. Barneyand p.

.,(h
M. \A,,righr,
ilcctiming ;r Strategicpartner:
The Role of ],Iuman Resr

uu*o,n,ou,r:;,;';; ;,:n,,"i,;:iil']?::l,lTi:ii":
X:;;:if;:,

' ,
A d v a n t a g cT h r o u g hp e o i l e l B o s t , , n :
"
I llt: j,r,., I;,; I',
24. S. Kerr,"On the Follv of
RewardingA, \\,hile Iloping I for L),,,
Academy
of ManagementJournal ig:4 (1975),76"9_;_8 "' ""r"''ir.
i
25. j. B. Barney,"F-irmResources
ard Sustaincd(bnrpctitive Advantage,,,
Journalof Managementt7 :t ( 1991 99_I
: I ; r,i.,q. p,..i"i"|,,The Corner),
stonesof CompetitiveAdvanraq^e:
A.llesoLrrceR,,r.d i;;;;
StrategicMan_
agementlournal 14:3(1993),I7g,t9t.
26. R. R. Wiggins and T W,1l:11i, ..Sustirinctl
(lmpetirrvc Ach.anrage:
TemporalD;.namicsand the Inciclence
and ircrsistcrrtlc
of SuperiorEconomic Performance,,,
OrganizationSr:ietttt.I
,,i iiix,:i'si_ ros.
27. Barney,"Firm Resources,and
Sustaincri( _onrpi:titiveAdvantage,,;
Peterai "The cornerstones c",,p;,i
;.,:'A;,;;i;f,:';
'A
wernerfelt,
"f Fir.,,,
ResourceBasedView of the
t,;:*;;.il;;;;;i:
ttrcntJournat5:2
( 1 9 8 4 )i,7 l _ 1 8 0 .
28. Peterai "The Cornerston-es
of (lonrpctjtjrt Aclvantrgd,;C. A. Montggmery_andS. Hariharan, ..Diversificd't4,,,,,ri,,,, t,,'i.lrge
"", lstablished
Firmsl' Journalof EconomicBehayi,,
r i, I f jqqii, 7 r,9q.
29. M. Porter,CompetitiveStrategl(Nov
).crrk: Irrecl)rc.ss,
1980).
30. C. M. Christensen,TheInnovator,sl)ilt:tttnt:
llTlcrrArcry.lbchnologies
CauseGreatFirn s to lhll (Boston:Harr-rnl
llusint.,ss
School,t ress,tllT).
31. Brown and Eisenhardt,Competntgort tlt(
lrltL..
32. /. Gimeno and .C.Woo, ..Multin.rarkct(_-ontirct,
llconorntesof Scope,
and Firm Performance,',Amdemy of lrln,,,,,qrr,,r,r't-lurrl,.,)'t
nr,l tlgg|),
239*259.
33. Christensen,TheInnovator\ Dilenntu.

7g*