Solution Manual for Strategic Management 6th Edition Rothaermel Frank ISBN 9781265954574

Strategic Management, 6e Teacher‘s Resource Manual

Solution Manual for Strategic Management 6th Edition Rothaermel Frank ISBN 9781265954574 Chapter 1-12

CHAPTER 1 What Is Strategy?

Teacher Resource Chapter Contents Teacher’s Resource Manual (TRM): Implementation Guide

ii

Learning Objectives

1

Textbook Chapter Contents

2

Chapter Teaching Resources

3

Overview of Chapter

5

Classroom Outline

7

Strategy Highlights

16

myStrategy

17

Discussion Questions

18

TRM Extra: Social/Ethical Questions

19

TRM Extra: Small Group Activities

19

Related MiniCase

20

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Strategic Management, 6e Teacher‘s Resource Manual

Teacher’s Resource Manual: Implementation Guide This Teacher‘s Resource Manual (TRM), supports delivery of your chosen curriculum and pedagogy.

This manual contains more than just guidance on how to cover concepts discussed in the sixth edition of Strategic Management; it also provides tips and best practices for how to utilize the full product suite (from the textbook to SmartBook® to Connect®). In addition, this manual includes a variety of supplemental teaching resources to enhance your ability to create an engaging learning experience for your students. Regardless of whether you teach in face-to-face traditional classrooms, blended (flipped) classrooms, online environments, or hybrid formats, you‘ll find everything you need in this improved resource.

The TRM follows the order of the textbook outline for each chapter and is divided into sections for each learning objective. Each section identifies the relevant PowerPoint slides from both the Lecture slides and the Supplemental Lecture slides (more on this below). This eases your preparation time for class as you can adjust slides as needed to ensure your students stay actively engaged throughout each session.

WHAT INSTRUCTOR RESOURCES ARE AVAILABLE? Within each section of the TRM you will find an assortment of examples, exercises, Connect® assignments, updates on the latest research, Strategy Smart Video discussions, and discussion questions and exercises from which you can choose to enhance your students‘ learning and engagement.

Within the Connect® Library, you will find the following: In the Test Builder tab, you can create tests from the Test Bank that can be printed or administered within your LMS. In the Instructor Resources, you can access all of the following items:         

Teacher‘s Resource Manual PowerPoints (Accessible) Application-Based Activities‘ accompanying Teaching Notes Create™ Case Support MiniCase Support Sample Syllabi Video Library Capsim‘s Capstone Simulation and Capsim IM Image Bank (for your customized PowerPoints)

1) This Teacher‘s Resource Manual is posted by chapter. ii © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual 2) Two sets of ADA-accessible PowerPoints are available with each chapter: a. Lecture slides cover chapter concepts and exhibits. b. Supplemental Lecture slides cover: i. ii. iii. iv.

Chapter Cases Strategy Highlights Implications for Strategic Leaders Strategy Smart Video selections (not part of the book, but an additional resource found here) v. Key Terms

3) Test Bank questions, found in the Library tab entitled Test Builder, are posted by chapter. You will find a variety of question types within the test bank such as Matching, Ranking, Multiple Choice, Select-All-That-Apply, True/False, Short Answer, and Essays to test student mastery across Bloom‘s Taxonomy (i.e. Understand, Apply, and Analyze).

4) Create™ Case Support (all cases are available in Create™ and selected ones in HBP) a. A case matrix that identifies the industry sector covered by each case, as well as the primary and secondary chapter alignments b. One-page case abstract for quick overview of each case c. Case Teaching Notes for instructor use only d. Case Financials in Excel files for the exhibit data in the most popular cases e. Case Strategic Financial Analysis template f. Instructions on How to Download SEC Financial Data into Excel Spreadsheets 5) MiniCase Support (all MiniCases are located in Part Four of the book) a. MiniCase Teaching Notes comprising suggested answers to the MiniCase discussion questions. In some instances, they also provide specific additional article and video resources to accompany each MiniCase.

6) Video Resources, located in the Video Library, provide links to supplemental video resources to accompany both the MiniCases and full-length Create™ cases, as well as links to all of the assignable videos in Connect®.

7) A link to Capsim’s Capstone Simulation and a Capsim Instructor’s Manual correlated to Strategic Management is provided; this simulation allows students to apply their knowledge of key strategy concepts.

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Strategic Management, 6e Teacher‘s Resource Manual

HOW CAN SMARTBOOK® ENHANCE MY STUDENTS’ PERFORMANCE? SmartBook® is assignable through Connect®, McGraw Hill‘s online assignment and assessment system.

One of the first fully adaptive and individualized study tools designed for students, it creates a personalized learning experience, giving students the opportunity to practice and challenge their understanding of core strategy concepts. The reporting tools within SmartBook® show where students are struggling to understand specific concepts.

Typically, SmartBook® is assigned by module (chapter), and instructors can set which learning objectives to cover as well as the number of probes the student will see for each assignment. Instructors also set the number of points a SmartBook® module is worth in the course. Usually, applying a minimal number of points for completion of each module is enough to encourage students to read the chapter.

Many instructors assign these modules to be completed before the class or online session.

SmartBook® provides several diagnostic tools for instructors to gauge which concepts their students struggle to understand. Below is the set of adaptive assignment reports available in SmartBook®:      

Progress Overview: View student progress broken down by module.

Student Details: View student progress details plus completion level breakdown for each module.

Module Details: View information on how your class performed on each section of their assigned modules.

Practice Quiz: This gives you a quick overview of your students‘ quizzes results.

Missed Questions Metacognitive Skills

By selecting ―Module Details‖ the instructor finds the results for the students in the class overall. These details reveal where in the chapters students might be struggling. The module gives the chapter section, average time spent, average questions per student correct/total, and the percentage of correctness (number of assigned items). Information about the most challenging sections for students can help instructors refine the focus of the next classroom or online session.

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Strategic Management, 6e Teacher‘s Resource Manual For more detailed analysis, SmartBook® captures students‘ confidence in their competency using the ―Metacognitive Skills‖ report. Below (a recreation of the Metacognitive Skills report), we find the second student is confident and mostly correct (91% in the correct & aware column) while the first student ―doesn‘t know what they don‘t know‖ (39% in the far-right column).

STUDENT

Student 1 Student 2 Student 3 Student 4 Student 5 Student 6 Student 7 Student 8 Student 9 Student 10

CORRECT and AWARE 61% 91% 81% 83% 76% 66% 77% 91% 93% 70%

CORRECT and UNAWARE 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

INCORRECT INCORRECT and AWARE and UNAWARE 0% 39% 3% 5% 0% 19% 0% 17% 3% 21% 9% 25% 3% 20% 2% 7% 2% 5% 6% 25%

APPLICATION EXERCISES, QUIZZES, AND TEST BANK What resources are available at the book level?

Connect® offers a wealth of content for both students and instructors. Application Exercises require students to apply key concepts to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor. Before getting into chapter-level assignments, let‘s look at the book-level assignments available.

Four exercises are available for instructors to assign beyond the chapter materials. These are 1) MiniCase Case Analyses, 2) Case Exercises, 3) Financial Ratio Reviews, and 4) MyStrategy exercises.

The Financial Ratio Reviews and MyStrategy exercises comprise our new Student Primer in Connect.

1) To encourage analytical thinking, each MiniCase from Part Four of the book is also an assignable application exercise (MiniCase Case Analysis). Each MiniCase is followed by four to five multiple-choice questions that assess students‘ understanding of the key issues presented in the MiniCase.

2) Case Exercises focus on the key symptoms and influences of a problem a firm might be facing, followed by a series of questions that help students understand how the firm eventually achieves a solution to that problem (or asks students to suggest a solution).

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Strategic Management, 6e Teacher‘s Resource Manual 3) Financial Ratio Reviews give students the opportunity to further hone their financial analysis skills; review exercises cover each type of financial ratio (activity, leverage, liquidity, market and profitability).

4) MyStrategy exercises for each chapter provide direct personal applications of strategy concepts to careers and lives to help students internalize the content.

What resources are available for each chapter and how should I integrate them in my course?

Consider assigning one or two Application Exercises per chapter. They are built around chapter learning objectives, so the instructor can choose based on their focus for each specific chapter. Several types of application exercises are available in each chapter. The newest additions are our Animated Videos, comprising three- to four-minute videos on key concepts or concepts that tend to challenge students the most. Each animation is accompanied by three to four multiple-choice questions to check student attention and comprehension. Comprehensive Case Analyses and our new On-Location Video Cases feature firms and industries different than those discussed in the textbook and provide relevant, topical information for students. Finally, Click-and-Drag exercises help students actively demonstrate their understanding of the associated learning objectives. Application Exercises can be assigned as preparatory exercises due before class (this is especially good for flipped classrooms), or after class as concept comprehension checks. Applications Exercises will generally be assigned as homework or practice as part of the overall class grade. A general rule of thumb would be to make application exercises worth 5 to 10 points each since these require time and thought.

To find the Applications in Connect®, go to ―Add Assignment‖ and then select ―Question Bank.‖ Application Exercises are organized by chapter. Instructors have the option to select for one attempt only, but they may want to give students unlimited or multiple attempts on the first few assignments to give students a chance to learn and navigate the system. (As the course progresses, instructors may want to tighten up the time on task and reduce the number of attempts to complete each exercise).

Chapter quizzes and full chapter test banks are available for assignment, and like the Application Exercises, are organized by chapter. The value applied to each question should be relatively low because numerous questions are usually assigned for each chapter. As such, make these questions worth 1 or 2 points each. The feedback given to students is time-flexible. Selecting feedback to be displayed after the assignment due date helps to keep students from giving the correct answers to other students while the questions are still available. For this reason, it is suggested that no feedback to quizzes and test bank exams be made available until after the assignment is due.

When should I assign these digital components?

To fully utilize the power of the digital components, instructors will often assign the SmartBook® reading and adaptive learning probes before class meets. Application Exercises can be completed either before or after class; if they are completed before class, they can sometimes serve as good springboards for class discussions. The chapter quiz makes a good check on comprehension of the material and may work best if assigned after each class period. The test bank serves as a good resource for building midterm or final exams. vi © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual More detailed information on SmartBook® and Connect® is available through several resources at McGraw Hill. A good starting point is your local Learning Technology Representative, who can be found here: http://www.mheducation.com/highered/platforms/connect/features-educators.html

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Strategic Management, 6e Teacher‘s Resource Manual

COURSE PREPARATION Helpful Suggestions Regarding Assignment Policies: Connect® gives instructors a wide array of flexibility in making assignments and creating grading policies. Instructors may choose to: 

assign as many assignments as appropriate given the level and time commitment expected for the class,



determine point values for each question/application that works within the total course percentages,



make available multiple attempts per assignment with options of accepting the highest score or averaging all the attempts together (several attempts are particularly good for homework assignments),



deduct points for late assignment submissions (percentage deduction per hour/day/week/etc.) or create hard deadlines thus accepting no late submissions,



show feedback on application/questions immediately upon submission or at the time the assignment is due for the whole class, create new assignments or questions from scratch, or edited versions from a variety of provided resources.

Throughout the TRM for each chapter, we will integrate materials from the Lecture PowerPoint slides, Supplemental Lecture slides, Connect® Application Exercises, and MiniCases. This integration of resources will allow for a cohesive presentation of the relevant resources at your disposal, helping you to convey these topics effectively and efficiently to your students.

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Strategic Management, 6e Teacher‘s Resource Manual

CHAPTER 1 Learning Objectives 1.1

Explain the role of strategy in a firm‘s quest for competitive advantage.

1.2

Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity.

1.3

Assess the relationship between stakeholder strategy and sustainable competitive advantage.

1.4

Conduct a stakeholder impact analysis.

1.5

Apply the Analysis, Formulation, Implementation (AFI) Strategy Framework.

What enables some firms to gain and then sustain their competitive advantage over time? Why do oncegreat firms fail? How can a firm‘s managers influence performance? Strategic management is the integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage. Many students will relate to strategy through sports analogies. You may want to start the course by discussing the contrast between a powerful sports dynasty and its weaker competitors.

In the United States, compare the Yankees to the Cubs. Why does U-Conn appear in the NCAA Men‘s and Women‘s Basketball Final Four so frequently? In other countries, you might compare Man U or Real Madrid to your local football club or discuss the ability of Mercedes to overwhelm the traditional strength of Ferrari in Formula 1. How have these teams built and implemented strategies? What successes have they seen? What resources do they have that their weaker rivals lack?

A chapter opening case on Tesla and two strategy highlights are included in the chapter for tangible applications of the theoretical frameworks discussed.

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Strategic Management, 6e Teacher‘s Resource Manual

Text Chapter Contents ChapterCase 1: Tesla: The Trillion-Dollar Tech Titan 1.1 What Strategy Is: Gaining and Sustaining Competitive Advantage (LO 1-1, LO 1-2) Strategy Highlight 1.1: Twitter Needs a Strategy CONNECT® INTEGRATION Whiteboard Video: Role of Strategy in a Firm's Quest for Competitive Advantage CONNECT® INTEGRATION Case Analysis: What Strategy Is: Gaining Competitive Advantage at Nvidia CONNECT® INTEGRATION Whiteboard Video: What is Competitive Advantage?

1.2 Stakeholder Strategy and Competitive Advantage (LO 1-3, LO 1-4) Strategy Highlight 1.2: Merck’s Stakeholder Strategy CONNECT® INTEGRATION Matching/Multiple Choice: Internal and External Stakeholders CONNECT® INTEGRATION Multiple Choice: Stakeholder Strategy CONNECT® INTEGRATION Matching/Multiple Choice: Social Responsibilities CONNECT® INTEGRATION Whiteboard Video: Stakeholder Impact Analysis

1.3 The Analysis, Formulation, Implementation (AFI) Strategy Framework (LO 1-5) CONNECT® INTEGRATION Multiple Choice: The AFI Strategy Framework CONNECT® INTEGRATION Multiple Choice: AFI Framework at Strategic Holdings, Inc. 2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual

1.4 Implications for Strategic Leaders ChapterCase 1 / Part II CONNECT® INTEGRATION Comprehension Case: Chapter Case—Tesla: The Trillion-Dollar Tech Titan

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Strategic Management, 6e Teacher‘s Resource Manual

Chapter Teaching Resources SECTION

Title

RESOURCE TYPE

CHAPTERCASE 1

Tesla: The Trillion-Dollar Tech Titan Tesla Customer Testimonial

Web Video (2 min)

Tesla‘s Musk says solar, energy storage will grow faster than electric cars

CNBC Article

Role of Strategy in a Firm's Quest for Competitive Advantage

Connect® Whiteboard Video

What Strategy Is: Gaining Competitive Advantage at Nvidia

Connect® Case Analysis

―What is Strategy?‖

Michael Porter Video (6 mins)

What is Competitive Advantage?

Connect® Whiteboard Video

Small Group Exercise: 3 Step Strategy

TRM Extra

Internal and External Stakeholders

Connect® Matching/Multiple Choice

Stakeholder Strategy

Connect® Multiple Choice

Social Responsibilities

Connect® Matching/Multiple Choice

Stakeholder Impact Analysis

Connect® Whiteboard Video

Ethical/ Social Issues: Merck

TRM Extra

Wells Fargo finally has a CEO

WSJ Article

1.1: What Strategy Is: Gaining and Sustaining Competitive Advantage

1.2: Stakeholder Strategy and Competitive Advantage

1.3: The Analysis, Formulation, Implementation (AFI) Strategy Framework

4 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual The AFI Strategy Framework

Connect® Multiple Choice

MiniCase 1: Whitney Wolfe Herd‘s Dating Strategy: From Tinder to Bumble

Rothaermel Textbook

AFI Framework at Strategic Holdings, Inc.

Connect® Multiple Choice

ChapterCase—Tesla: The TrillionDollar Tech Titan

Connect® Comprehension Case

Competitive Advantage

BCG Interview (14 mins)

1.4: Implications for Strategic Leaders

Overview of the Chapter 1.1

What Strategy Is: Gaining and Sustaining Competitive Advantage Strategy is a set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors. To craft a good strategy requires three critical steps: (1) diagnosing the competitive challenges facing the organization; (2) providing a guiding policy on how to deal with the competitive challenges identified; and (3) effective implementation through a coherent set of actions. This section discusses the difference between a Competitive Advantage and a Sustained Competitive Advantage. It also explores why Grandiose Statements, failure to face a Competitive Challenge and tactical tools such as Competitive Benchmarking are not strategy.

1.2

Stakeholder Strategy and Competitive Advantage At the core of strategy studies is the concept of Value Creation. Stakeholder Strategy focuses on how organizations, groups, and individuals can affect or be affected by a firm‘s actions.

Stakeholders can be internal or external. All stakeholders make specific contributions to a firm.

Exhibit 1.2 illustrates the steps necessary to perform a Stakeholder Impact Analysis. Effective stakeholder management can act to improve firm performance, thereby enhancing the firm‘s competitive advantage. Strategy Highlight 1.2 discusses the Stakeholder Strategy implemented

by Merck.

1.3

The Analysis, Formulation, Implementation (AFI) Strategy Framework The AFI Strategy Framework provides a basis for understanding the interdependent relationships necessary to manage the strategy process. Exhibit 1.4 shows the framework and provides a discussion of the subcomponents as well as a roadmap to where these components are addressed in this book. The Analysis aspects are covered in Chapters 2 to 5. The Formulation components, including Business, Corporate and Global Strategy, are found in Chapters 6 to 10.

5 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual The Implementation topics of Organizational Design, Corporate Governance and Business Ethics reside in chapters 11 & 12.

1.4

Implications for Strategic Leaders Strategy is the art and science of success and failure. Strategic leaders are making decisions under conditions of uncertainty and complexity. They must monitor and evaluate the progress toward key objectives. ChapterCase 1/Part II allows students to explore the strategy quality and implications of Tesla‘s new master plan.

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Strategic Management, 6e Teacher‘s Resource Manual

Classroom Outline ChapterCase 1 Tesla: The Trillion-Dollar Tech Titan The opening ChapterCase discusses Tesla‘s strategy and its connection to its current trillion-dollar valuation. CEO Elon Musk wrote a public blog in 2006 that basically laid out the plans for the first decade of the firm. He seems to be doing quite well with his four-step plan.

INSTRUCTOR SUPPLEMENT SLIDES 2-4

STRATEGY SMART VIDEO EXAMPLE INSTRUCTOR SUPPLEMENT SLIDE 13 This slide links to a two-minute interview with a Tesla customer who speaks about his Tesla car and home battery storage.

ChapterCase 1 Part II The closing ChapterCase provides information on the current challenges that Tesla faces. Uncertainty still exists around the transition to EVs, competition from legacy automakers, the ability to ramp up production on a global scale, and a lack of a succession plan.

ChapterCase 1 Discussion Questions 1.

Do you agree with the assessment that Elon Musk and Tesla successfully fulfilled the first master plan published in 2006? Why or why not? To answer this question, apply the three-step process for crafting a good strategy explained in Section 1.1 (diagnose the competitive challenge, derive a guiding policy, and implement a set of coherent actions).

Given the uncertainty of the electric vehicle industry (especially in 2006) most would agree Tesla has done an amazing job of meeting its plans. Ultimately though it needs to scale up the Model 3 cars to really complete the plan. With recent reports that new plants in Texas and Germany are "gigantic money furnaces", there is concern regarding Tesla‘s future financial performance. Thus, the argument against the company‘s successful execution is most tangible in ―step 3‖ largely due to supply chain and production issues.

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Strategic Management, 6e Teacher‘s Resource Manual 2.

Apply again the three-step process for crafting a good strategy (see Section 1.1), this time to each element of the new master plan. On which steps of the new master plan has Tesla made the most progress? Explain. Which actions will be the most difficult to accomplish? Why?

Tesla is putting out a master plan for the long term and in concert with Mr. Musk‘s views on the need for sustainable clean energy sources. They have diagnosed this area as not only a business opportunity (which some question as viable) but a larger need for society. To accomplish this challenge, they have again laid out a guiding policy with coherent steps for the firm to follow. Students may argue that the self-driving capability and idea of making money from your own car is beyond the integrated energy company vision. Though Tesla inspires many people, especially the millennial and Generation Z segments, profitability is still elusive and inconsistent. This is especially a concern as the aspirations of the master plan require large investments in new areas to be successful. Students may also point to Musk‘s purchase of Twitter as another area where he has not followed the master plan.

3.

Overall, does Tesla have a good strategy? Why or why not? How do you know? Explain.

The chapter covers this question in some detail. The firm seems set up with a compelling vision from diagnosis and also a guiding policy. The biggest question is the execution of its coherent actions in scaling up both the battery factory and the auto assembly lines in a cost-effective manner with the required high quality of products. As they expand models to include trucks, semi-trucks, and more car models, the importance of additional manufacturing capacity (like in their Shanghai giga3 factory) will be vital if they are to be successful. There may already be signs that point to trouble given the money issues that manufacturing facilities in Germany and Texas are experiencing. Tesla also needs to demonstrate that by scaling they can bring in consistent profits.

3.

Of the threats listed in Part II of the ChapterCase, which do you consider the most significant? How would you recommend that Musk and Tesla address each of these challenges?

Students will have a wide variety of responses to this question, and it provides an interesting point for discussion. The low transition rate to EVs may be less of an issue given current inflation and the rising price of gas. While legacy automakers have increased their EV offerings, Tesla is still a recognized and respected brand in this area. Additionally, Tesla vehicles tend to outperform legacy automakers‘ EVs on several key elements (most notably: range). As this time, issues with supply chains and demand make the global scale issue to be the most salient. A wide variety of solutions exist including partnerships and alliances.

DISCUSSION TOPIC In February 2017 Tesla Motors became just Tesla. After the Solar City purchase was approved in November of 2016, the firm is repositioning itself as the ―world‘s first vertically integrated sustainable energy company.‖ Tesla now has solar panels and soon will have solar roof tiles for generating electricity. Then the company is making batteries for storing energy. Finally, Tesla produces cars, SUVs and has announced plans for semi-tracker trailer trucks to consume the electricity. (See ―Elon Musk‘s 8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual Tesla Drops ‗Motors‘ From Name.‖). In December 2019, Musk gave an interview to CNBC after Tesla showed a quarterly profit with Model 3 production but touting the growth planed for solar and storage above the growth of electric cars. (Tesla‘s Musk says solar, energy storage will grow faster than electric cars).

1.1 WHAT STRATEGY IS: GAINING AND SUSTAINING COMPETITIVE ADVANTAGE LO 1-1 Explain the role of strategy in a firm‘s quest for competitive advantage.

LECTURE SLIDES 3 - 15 DISCUSSION TOPIC Strategy is a set of goal-directed actions a firm intends to take in its quest to gain and sustain competitive advantage relative to competitors. A good strategy consists of three elements: A diagnosis of the competitive challenge, a guiding policy to address the competitive challenge, and a set of coherent actions to implement the firm‘s guiding policy. The strategic management process, therefore, is a neverending cycle of analysis, formulation, implementation, and feedback. Strategy is neither grandiose statements, a failure to face a competitive challenge, nor operational effectiveness. Different plans and activities may be called a ―strategy,‖ but like operational effectiveness, they are not part of our definition for this textbook. Pricing strategies, Six Sigma, and other programs are more likely to be tools for improvement and not lead to a competitive advantage.

Strategy Highlight 1.1 Does Twitter Have a Strategy?

Click here for a summary of the Strategy Highlight covering the application of the three elements of a good strategy to Twitter (hint: it doesn‘t look too good).

INSTRUCTOR SUPPLEMENT SLIDES 6: DOES TWITTER HAVE A STRATEGY?

INTEGRATION Whiteboard Video: Role of Strategy in a Firm's Quest for Competitive Advantage This animated video covers strategy, which is inherently competitive, is a juxtaposition of competitive challenges and the resources that can be marshaled by the firm. This activity is important because as a manager, you must be able to articulate the role of strategy in a firm‘s quest for competitive advantage.

The blending of military and business strategy is discussed. 

Difficulty: Medium  Blooms: Apply

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Strategic Management, 6e Teacher‘s Resource Manual LO 1-2 Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity.

Competitive advantage is always relative, not absolute. Explain the differences among competitive disadvantage, competitive parity, temporary competitive advantage, and sustainable competitive advantage. Competitive advantage must come from performing different activities or performing the same activities differently than rivals are doing.

If you chose to start the course with a sports analogy for competition and your group of students has a high level of engagement with that topic, you might want to reintroduce it at this point in your lecture with a sports-related example. Ask students to consider what new strategies longtime industry leader ESPN could pursue, more effectively than firing talent, to combat the industry trend of customers trying to cut cable bills. (See WSJ article ―ESPN Tightens Its Belt as Pressure on It Mounts,‖) This example tends to resonate with students because their age group is in the forefront of the trend to replace cable TV with streaming options, such as Netflix, Disney+, Apple TV, Hulu Live, and Amazon Prime.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 14 This slide links to a video in which Professor Michael E. Porter, author of many books on competitive strategy, outlines his perspective of strategy.

INTEGRATION Case Analysis: What Strategy Is: Gaining Competitive Advantage at Nvidia This case analysis provides the students an opportunity to think through the three elements of a good strategy with a complementary application from the textbook. The case also helps students see the value in learning from failures. The case here ties closely to the materials in the beginning sections of Chapter 1. Students will read the case and then answer the four questions following it. 

Difficulty: Medium  Blooms: Apply

Follow-Up Activity: The instructor can expand on the concepts in this case analysis by comparing some of the business decisions made by Nvidia and Apple. Many students may not be familiar with Nvidia as a firm, but they may find some of their favorite gaming devices are powered by Nvidia products. We find students sometimes lacking in business-to-business experiences and firms such as Nvidia, which are not retail oriented, can enhance their conceptual application and give students thought-provoking business examples.

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Strategic Management, 6e Teacher‘s Resource Manual

INTEGRATION Whiteboard Video: What is Competitive Advantage?

This animated video covers competitive advantage, which is fundamentally comparative. Only through comparison can firms gain a better understanding of how well they are performing in the context of their respective markets. This activity uses a track and field race analogy to address the key concepts of competitive advantage, and it is important because competition is at the heart of business. 

Difficulty: Medium

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 15 This slide links to a 1:35-minute video by Michael Porter who who outlines two critical aspects management: having the right goal and differentiating.

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity around the three elements of a good strategy.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 16 This slide links to an approximately five-minute features Doreen Shanahan, Professor of Marketing at Pepperdine University discussing the seven steps to creating a competitive advantage.

INSTRUCTOR SUPPLEMENT SLIDE 17 This slide links to a two-minute video by Michael Porter on critical aspects of good management including the importance of having the right goals for the organization.

1.2 STAKEHOLDER STRATEGY AND COMPETITIVE ADVANTAGE LECTURE SLIDES 16 - 21 LO 1-3 Assess the relationship between stakeholder strategy and sustainable competitive advantage.

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Strategic Management, 6e Teacher‘s Resource Manual DISCUSSION TOPIC Stakeholders are organizations, groups, and individuals who have a vested interest in the performance and survival of the firm. Stakeholder strategy is a framework that connects corporate governance, business ethics, and strategic leadership and thus helps managers think through these issues in a holistic fashion. Stakeholder theory is a theoretical framework that is concerned with how different stakeholders create and trade value. Instructors can discuss the importance of public companies and their influence on our daily life. Students need to understand the interdependent relationships between these organizations and the average citizen. Then, discuss the importance of the public companies‘ stakeholders and why companies need to take good care of them. The answer is, ―It is an interdependent relationship.‖ Only by taking care of the stakeholders can they create a win–win, with mutually beneficial results to both companies and to society. This section sets a foundation that allows instructors to talk later about social responsibilities.

INTEGRATION Matching/Multiple Choice: Internal and External Stakeholders This activity reviews the role of stakeholders and their relationship to a firm‘s competitive advantage.

Students will identify the unique contributions of and benefits for different stakeholders. 

Difficulty: Medium

 Blooms: Analyze

INTEGRATION Multiple Choice: Stakeholder Strategy This activity will help students identify the benefits of an effective shareholder strategy, showing them that stakeholder strategy has an impact not only on the firm, but on all those with an interest in it. 

Difficulty: Medium  Blooms: Remember

INTEGRATION Matching/Multiple Choice: Social Responsibilities

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Strategic Management, 6e Teacher‘s Resource Manual This activity will help students understand the need for corporate social responsibility when conducing a stakeholder impact analysis. Students will recognize how companies can practice different forms of social responsibility.  

Difficulty: Medium Blooms: Analyze

INTEGRATION Whiteboard Animation: Stakeholder Impact Analysis This video shows students the importance of paying attention to all of the stakeholders who may be impacted by your strategic decisions.  

Difficulty: Medium Blooms: Analyze

LO 1-4 Conduct a stakeholder impact analysis.

DISCUSSION TOPIC Stakeholder impact analysis is a decision tool with which managers can recognize, assess, and address the needs of different stakeholders to allow the firm to perform optimally and act as a good corporate citizen. Stakeholder impact analysis is a five-step analysis. Who are our stakeholders? What are our stakeholders‘ interests? What opportunities and threats do our stakeholders present? What economic, legal, ethical, and philanthropic responsibilities do we have to our stakeholders? What should we do to effectively address the stakeholder concerns?

An effective way to get students to consider stakeholders is to use an organization that is deeply familiar to them: their college or university. Students will immediately identify themselves, faculty, and staff as important stakeholders, but upon deeper reflection, they‘ll begin to identify other stakeholders (e.g., local residents, their parents, alumni, vendors, suppliers, etc.) Creating an issue can also help them identify how different problems impact different stakeholders differently. Issues can include receiving money from a controversial donor, an issue with Greek life, a cheating scandal, etc. Possible business examples to illustrate the five-step stakeholder impact analysis could be BP‘s relationships with its shareholders and U.S. government agencies. Another possibility is Nestle‘s relationships with its shareholders, its customers, and nutrition activists. If you choose the Nestle example, you may want to ask students to read the comments about Nestle in its social media pages. A way to make this discussion more interesting if you have journalism, public relations, public health, or communications majors in your course, would be to invent an ―event‖ for Nestle. Then ask selected students to ―report‖ on the incident from a few different perspectives and ask other students to present the company‘s position, as if they were the CEO. 13 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual

Strategy Highlight 1.2 Merck’s Stakeholder Strategy Click here for a summary of the Strategy Highlight covering a series of strategic steps applied to Merck.

INSTRUCTOR SUPPLEMENT SLIDE 7: MERCK’S STAKEHOLDER STRATEGY

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for some thoughts on a further discussion of stakeholder tradeoffs at Merck.

EXAMPLES You might want to use an example to show that firms with lax ethical values hurt more than their shareholders. Using a giant Ponzi scheme, Bernie Madoff, with the help of several employees in his investment securities firm, defrauded high-profile institutional and individual investors such as the bank HSBC, Banco Santander, Human Rights First, the International Olympic Committee, film producer and CEO of DreamWorks Animation Jeffrey Katzenberg, actor Kevin Bacon, and Nobel Peace Prize winner Elie Wiesel. Madoff‘s fraud totaled an estimated $65 billion. He was sentenced to 150 years imprisonment and fines of more than $170 billion. (See WSJ, ―Q&A on Madoff Case.‖) Businesses also have an ability to influence the ethical decisions of other organizations. The recent FIFA scandal offers a great example of this. Corporate sponsors of football (soccer) had not taken action during years of rumors of FIFA corruption, but in 2015 that changed. Coca-Cola, Emirates, Sony, and other firms have used their sponsorship dollars to make a statement about ethics and integrity. (See WSJ ―FIFA Corruptions Scandal Pressures Soccer Governing Body‘s Sponsors.‖) Wells Fargo has been plagued with ethics and legal issues such as opening thousands of fake bank accounts to artificially meet managerial goals. Real customers were sometimes charged fees from these bogus accounts and had to deal getting them closed once they discovered they existed. In response, Wells Fargo fired thousands of low-level branch workers, but observers question if the executives and managers who set up the policies leading to this fraud have been properly penalized. The firm brought in an outside CEO in October 2019. Charles Scharf is the fourth CEO since 2016 and the first outsider in several decades (See WSJ ―Wells Fargo finally has a CEO.‖)

1.3 THE ANALYSIS, FORMULATION, IMPLEMENTATION (AFI) STRATEGY FRAMEWORK LECTURE SLIDES 22 - 23 LO 1-5 Apply the Analysis, Formulation, Implementation (AFI) Strategy Framework.

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Strategic Management, 6e Teacher‘s Resource Manual The Analyze, Formulate and Implement framework is the organizing principle of this book. It seeks to capture the interdependent relationships needed for organizations to generate competitive advantage.

The framework can help managers formulate and implement strategies that will lead to superior performance.

EXAMPLES You might consider using discussion of a popular movie that illustrates strategy, such as The Martian or Ocean‟s 8. What were the keys to the hero‘s success? These types of examples will enable you to bring out the importance of careful analysis, a well-formulated strategy, and effective implementation. Each also offers illustrations of effective and ineffective strategic leadership.

Additionally, MiniCase 1: Whitney Wolfe Herd‘s Dating Strategy: From Tinder to Bumble is a good example for discussion of the elements of a good strategy. This MiniCase showcases Whitney Wolfe Herd‘s successful runs with Tinder and Bumble and highlights the process of developing and implementing an effective strategy.Wolfe Herd‘s marketing acumentwas a major driver of Tinder‘s great success, with a base over 100,000 in the first months of it‘s launch. In December 2014, after leaving Tinder, she started Bumble, another successful dating app.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 13 This slide has a link to a two-minute video regarding Tesla and why one man chose to own a Tesla and how it integrates with his values.

INTEGRATION Multiple Choice: The AFI Strategy Framework This multiple choice activity shows students how successful strategy happens—when leaders perform these three actions interdependently. Students will identify the strategic questions that managers focus on in achieving superior performance. They will read each question and categorize it according to its task (Analysis, Formulation, or Implementation). 

Difficulty: Medium

 Blooms: Apply

INTEGRATION Multiple Choice: AFI Framework at Strategic Holdings, Inc. 15 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual This multiple choice activity shows students the importance of the AFI Framework in devising and understanding a firm‘s strategic choices. In this activity, students will identify the components of the AFI Framework at a fictional company. 

Difficulty: Medium

 Blooms: Remember

1.4 IMPLICATIONS FOR STRATEGIC LEADERS INSTRUCTOR SUPPLEMENT SLIDE 9 DISCUSSION TOPIC A nice 14-minute video to illustrate the implications for strategists is this one by James Goth, Partner and Managing Director of BCG, Competitive Advantage. He discusses the meaning of competitive advantage and strategy.

Strategy Highlights Strategy Highlight 1.1 Does Twitter Have a Strategy?

This highlight looks at Twitter through the lens of the three elements of a good strategy. Twitter certainly faces several competitive challenges, but the firm does not seem to have a guiding policy for how to address these challenges. Coherent actions can be difficult with a clear guiding policy but in the case of Twitter the goals of the firm change frequently, and the culture of the firm is not conducive to coordinated actions. The highlight suggests that Twitter may be a takeover target if it does not find a profitable and growing business model. In a twist, Twitter is a takeover target of Elon Musk!

Strategy Highlight 1.2 Merck’s Stakeholder Strategy This highlight discusses the vision of Merck and two examples of how it operates relative to this vision for the benefit of the stakeholders. Merck is applauded for major contributions to the eradication of Africa‘s river blindness parasitic disease. However, its actions in the case of Vioxx are more questionable. Vioxx turned out to have more severe side effects than the pain-killing remediation it was designed to attack. Though Merck did eventually voluntarily withdraw the drug from the marketplace, many question whether it should have ever pushed it out into the market with the information the firm 16 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual had about side effects. Vioxx was initially a blockbuster success in the marketplace which was good for the stock owners but it turned out not to be good for the firm‘s customers.

INTEGRATION Comprehension Case: ChapterCase—Tesla: The Trillion-Dollar Tech Titan Here, we provide both Parts 1 and 2 of this case, accompanied by short-answer questions that students can complete and submit. Due to the nature of these open-ended questions, they require manual grading. 

Difficulty: Medium  Blooms: Apply

my Strategy INSTRUCTOR SUPPLEMENT SLIDE 9: STRATEGY IS THE ART AND SCIENCE OF SUCCESS AND FAILURE How do you think about accomplishing your goals? One way to strategize your success is to use a version of the stakeholder impact analysis. On a personal level, your internal stakeholders might be immediate family members and close personal friends. External stakeholders could be neighbors, peers, funding sources, and managers.

A key aspect presented in this chapter is to consider the point of view of a variety of stakeholders in meeting the goals of the firm. The same logic applies to many of your own personal or career goals as well. For instance, let‘s say you are close to graduating from a university. How do your stakeholders view your job and career prospects? Do they want you to stay close to home? Do they encourage you to start a new business?

As noted in the chapter, stakeholders will have different points of view and different levels of impact upon your successes or failures.

1. List your personal goals. Which stakeholders are supportive of these goals? Which are likely to try to block these goals?

These questions are meant to be personal but we offer a few thoughts on them. Goal setting and sharing has been shown to be a key of success for many people. Career related goals are impacted by both close relationships and those further away. Students are encouraged to write down internal stakeholders like parents and siblings and decide if each is supportive of the given goal. Then they are asked to think about teachers, coaches, friends, and parents of friends who are more like external stakeholders.

Particularly important may be these external relationships that are supportive of your goal.

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Strategic Management, 6e Teacher‘s Resource Manual 2. Develop a plan to address key stakeholder concerns from each perspective. Can you find a pathway in the stakeholder analysis to build support for your key goals?

Using the list of stakeholders above, the student can adapt the stakeholder impact analysis (exhibit 1.2) to map out supporting players and also to mitigate stakeholders who are not in favor of the goal.

3. What would it take to implement your ideas/plans to move forward with these goals?

Implementation needs to have both timeframe and time commitment elements for success. Saying ―I will save 10 percent of my income over the next 6 months to have funds to start my own company‖ may be a great start. It establishes a timeframe. But from the commitment perspective, what will you be giving up to save that extra money? If you have not previously been able to save funds from your paycheck, what behaviors will be different going forward to make this goal achievable? Who on your stakeholder list can be most helpful in achieving this goal?

Discussion Questions 1. The text discusses strategic trade-offs that are different between Walmart and Nordstrom even though they are in the same industry. Think of another industry that you know fairly well and select two firms there that also have made very different choices for these tradeoffs. Describe some of the differences between these firms. What type of trade-off decisions have these firms made?

Tesla and GM would be an example building on other firms discussed in this chapter. It should be clear to the students that these firms are making quite different decisions regarding their strategies and resources. Restaurants are often a fertile ground for student discussions as well. A local high-end steak restaurant versus a chain like Applebee‘s for example should yield a number of differences in company decisions that would be enlightening to think about.

2. Corporate social responsibility has four components. Do you agree that public firms should address all four elements? Why or why not? If not, where should the firm "draw the line?‖ Please provide an example to explain your logic.

The Friedman view of the stockholder (owner) purpose of a firm, has come under increasing scrutiny in recent years. A variety of business organizations, individual firms, and major investors are raising issues of societal equity and health of the planet rather than strictly optimizing shareholder returns. Student views are likely to reflect this broader dialogue about the role of the firm in the 21st century. The chapter‘s focus on Tesla is a great example to use. Musk‘s goals are not focused on profits—there is a built-in environmental and societal mission in each component of his master plan.

3. In the discussion about Merck (Strategy Highlight 1.2), the firm faces difficult situations about life-saving drugs. What is your assessment of Merck's consideration of various stakeholders in the two situations described?

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Strategic Management, 6e Teacher‘s Resource Manual The chapter argues that the river blindness case was Merck at its best in reflecting the founder and company values. The Vioxx case is murkier. Students may want to do some additional internet searches about this incident before a class discussion. Nearly all will agree in the importance of the customer as a stakeholder, certainly for the long-term health of the business. In the case of Vioxx it may be the shortterm focus on stockholders overwhelmed the longer-term benefits of the customer.

TRM Extra: Ethical/Social Questions 1. In the discussion about Merck (Strategy Highlight 1.2) it is clear the firm has followed a socially responsible path by donating more than 1 billion drug treatments to remedy river blindness in remote African communities. Yet Merck must also meet shareholder responsibilities and make profits on drugs in use in more affluent societies. How should a responsible firm make these trade-offs? What steps can strategic leaders take to guide organizations on these challenging issues?

This is an excellent topic for an in-depth class exercise on ethical considerations in strategy. If your course requires an assessment on ethics and social responsibility, then you could require the students to write a position paper recommending a strategy position for Merck on pricing of critical drugs in impoverished regions, that addresses both patient needs and firm profit objectives. Some aspect of shortterm and long-term view is helpful to keep in mind also for such trade-offs. Such an assignment could be used either in an online course or a classroom setting.

TRM Extra: Small Group Activity 1. The chapter applies the three elements of a good strategy to Tesla for insights into the company‘s possible competitive advantage. As a group, choose a different firm that is well known and familiar to you. Determine the firm‘s competitive challenges and company guiding policies and search the internet for information about the firm‘s actions. As a group, discuss key actions the firm has taken and decide if they seem to be coherent. Does the firm demonstrate measures of a competitive advantage? If yes, does it look to be sustainable?

Students should choose a public company they know pretty well and have access to the internet to look up information about the firm to be able to give a reasonable answer to this question. Most students will begin by performing a cursory search, and they will likely have no issues finding news articles that deal with the firm‘s actions. Groups will need additional help finding the key success factors for the firm from either the website or a recent annual report. It may be helpful to show students how they may have to dig through the ―Investor Relations‖ sections of company websites or through SEC filings. It may also be useful to have students share their sources and compile a list of places to gather information on firms. Have the students move through each of the three steps in the good strategy methodology to reach a conclusion about how the firm is positioned. They should be on the lookout for some of the bad strategy elements such as ―grandiose statements‖ while they are researching the firm.

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Strategic Management, 6e Teacher‘s Resource Manual Another element that may deepen the discussion is to have students discuss the differences in how firms report information. While some firms make the information readily accessible, other firms have ―hidden‖ or made accessing basic information much more difficult. This exercise is also a possible display of how different industries may have different norms. Be flexible in the discussion—this exercise may be the first-time students have holistically thought about what companies do and say.

Related MiniCase Instructors may want to consider assigning and discussing the following MiniCase that covers topics found in this chapter. All MiniCases have assignable McGraw Hill Connect® case questions available.

MiniCase 1: Whitney Wolfe Herd‘s Dating Strategy: From Tinder to Bumble

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Strategic Management, 6e Teacher‘s Resource Manual

CHAPTER 2

Strategic Leadership: Managing the Strategy Process Teacher Resource Chapter Contents

Teacher’s Resource Manual (TRM): Implementation Guide

ii

Learning Objectives

1

Textbook Chapter Contents

2

Chapter Teaching Resources

3

Overview of Chapter

5

Classroom Outline

6

Strategy Highlights

22

myStrategy

23

Discussion Questions

23

TRM Extra: Social/Ethical Questions

25

TRM Extra: Small Group Activities

26

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Strategic Management, 6e Teacher‘s Resource Manual Related MiniCase

27

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Strategic Management, 6e Teacher‘s Resource Manual

Teacher’s Resource Manual: Implementation Guide This Teacher‘s Resource Manual (TRM), supports delivery of your chosen curriculum and pedagogy.

This manual contains more than just guidance on how to cover concepts discussed in the sixth edition of Strategic Management; it also provides tips and best practices for how to utilize the full product suite (from the textbook to SmartBook® to Connect®). In addition, this manual includes a variety of supplemental teaching resources to enhance your ability to create an engaging learning experience for your students. Regardless of whether you teach in face-to-face traditional classrooms, blended (flipped) classrooms, online environments, or hybrid formats, you‘ll find everything you need in this improved resource.

The TRM follows the order of the textbook outline for each chapter and is divided into sections for each learning objective. Each section identifies the relevant PowerPoint slides from both the Lecture slides and the Supplemental Lecture slides (more on this below). This eases your preparation time for class as you can adjust slides as needed to ensure your students stay actively engaged throughout each session.

WHAT INSTRUCTOR RESOURCES ARE AVAILABLE? Within each section of the TRM you will find an assortment of examples, exercises, Connect® assignments, updates on the latest research, Strategy Smart Video discussions, and discussion questions and exercises from which you can choose to enhance your students‘ learning and engagement.

Within the Connect® Library, you will find the following: In the Test Builder tab, you can create tests from the Test Bank that can be printed or administered within your LMS. In the Instructor Resources, you can access all of the following items:         

Teacher‘s Resource Manual PowerPoints (Accessible) Application-Based Activities‘ accompanying Teaching Notes Create™ Case Support MiniCase Support Sample Syllabi Video Library Capsim‘s Capstone Simulation and Capsim IM Image Bank (for your customized PowerPoints)

8) This Teacher‘s Resource Manual is posted by chapter.

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Strategic Management, 6e Teacher‘s Resource Manual 9) Two sets of ADA-accessible PowerPoints are available with each chapter: a. Lecture slides cover chapter concepts and exhibits. b. Supplemental Lecture slides cover: i. ii. iii. iv.

Chapter Cases Strategy Highlights Implications for Strategic Leaders Strategy Smart Video selections (not part of the book, but an additional resource found here) v. Key Terms

10) Test Bank questions, found in the Library tab entitled Test Builder, are posted by chapter. You will find a variety of question types within the test bank such as Matching, Ranking, Multiple Choice, Select-All-That-Apply, True/False, Short Answer, and Essays to test student mastery across Bloom‘s Taxonomy (i.e. Understand, Apply, and Analyze).

11) Create™ Case Support (all cases are available in Create™ and selected ones in HBP) a. A case matrix that identifies the industry sector covered by each case, as well as the primary and secondary chapter alignments b. One-page case abstract for quick overview of each case c. Case Teaching Notes for instructor use only d. Case Financials in Excel files for the exhibit data in the most popular cases e. Case Strategic Financial Analysis template f. Instructions on How to Download SEC Financial Data into Excel Spreadsheets 12) MiniCase Support (all MiniCases are located in Part Four of the book) a. MiniCase Teaching Notes comprising suggested answers to the MiniCase discussion questions. In some instances, they also provide specific additional article and video resources to accompany each MiniCase.

13) Video Resources, located in the Video Library, provide links to supplemental video resources to accompany both the MiniCases and full-length Create™ cases, as well as links to all of the assignable videos in Connect®.

14) A link to Capsim’s Capstone Simulation and a Capsim Instructor’s Manual correlated to Strategic Management is provided; this simulation allows students to apply their knowledge of key strategy concepts.

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Strategic Management, 6e Teacher‘s Resource Manual

HOW CAN SMARTBOOK® ENHANCE MY STUDENTS’ PERFORMANCE? SmartBook® is assignable through Connect®, McGraw Hill‘s online assignment and assessment system.

One of the first fully adaptive and individualized study tools designed for students, it creates a personalized learning experience, giving students the opportunity to practice and challenge their understanding of core strategy concepts. The reporting tools within SmartBook® show where students are struggling to understand specific concepts.

Typically, SmartBook® is assigned by module (chapter), and instructors can set which learning objectives to cover as well as the number of probes the student will see for each assignment. Instructors also set the number of points a SmartBook® module is worth in the course. Usually, applying a minimal number of points for completion of each module is enough to encourage students to read the chapter.

Many instructors assign these modules to be completed before the class or online session.

SmartBook® provides several diagnostic tools for instructors to gauge which concepts their students struggle to understand. Below is the set of adaptive assignment reports available in SmartBook®:      

Progress Overview: View student progress broken down by module.

Student Details: View student progress details plus completion level breakdown for each module.

Module Details: View information on how your class performed on each section of their assigned modules.

Practice Quiz: This gives you a quick overview of your students‘ quizzes results.

Missed Questions Metacognitive Skills

By selecting ―Module Details‖ the instructor finds the results for the students in the class overall. These details reveal where in the chapters students might be struggling. The module gives the chapter section, average time spent, average questions per student correct/total, and the percentage of correctness (number of assigned items). Information about the most challenging sections for students can help instructors refine the focus of the next classroom or online session.

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Strategic Management, 6e Teacher‘s Resource Manual For more detailed analysis, SmartBook® captures students‘ confidence in their competency using the ―Metacognitive Skills‖ report. Below (a recreation of the Metacognitive Skills report), we find the second student is confident and mostly correct (91% in the correct & aware column) while the first student ―doesn‘t know what they don‘t know‖ (39% in the far-right column).

STUDENT

Student 1 Student 2 Student 3 Student 4 Student 5 Student 6 Student 7 Student 8 Student 9 Student 10

CORRECT and AWARE 61% 91% 81% 83% 76% 66% 77% 91% 93% 70%

CORRECT and UNAWARE 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

INCORRECT INCORRECT and AWARE and UNAWARE 0% 39% 3% 5% 0% 19% 0% 17% 3% 21% 9% 25% 3% 20% 2% 7% 2% 5% 6% 25%

APPLICATION EXERCISES, QUIZZES, AND TEST BANK What resources are available at the book level?

Connect® offers a wealth of content for both students and instructors. Application Exercises require students to apply key concepts to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor. Before getting into chapter-level assignments, let‘s look at the book-level assignments available.

Four exercises are available for instructors to assign beyond the chapter materials. These are 1) MiniCase Case Analyses, 2) Case Exercises, 3) Financial Ratio Reviews, and 4) MyStrategy exercises.

The Financial Ratio Reviews and MyStrategy exercises comprise our new Student Primer in Connect.

5) To encourage analytical thinking, each MiniCase from Part Four of the book is also an assignable application exercise (MiniCase Case Analysis). Each MiniCase is followed by four to five multiple-choice questions that assess students‘ understanding of the key issues presented in the MiniCase.

6) Case Exercises focus on the key symptoms and influences of a problem a firm might be facing, followed by a series of questions that help students understand how the firm eventually achieves a solution to that problem (or asks students to suggest a solution).

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Strategic Management, 6e Teacher‘s Resource Manual 7) Financial Ratio Reviews give students the opportunity to further hone their financial analysis skills; review exercises cover each type of financial ratio (activity, leverage, liquidity, market and profitability).

8) MyStrategy exercises for each chapter provide direct personal applications of strategy concepts to careers and lives to help students internalize the content.

What resources are available for each chapter and how should I integrate them in my course?

Consider assigning one or two Application Exercises per chapter. They are built around chapter learning objectives, so the instructor can choose based on their focus for each specific chapter. Several types of application exercises are available in each chapter. The newest additions are our Animated Videos, comprising three- to four-minute videos on key concepts or concepts that tend to challenge students the most. Each animation is accompanied by three to four multiple-choice questions to check student attention and comprehension. Comprehensive Case Analyses and our new On-Location Video Cases feature firms and industries different than those discussed in the textbook and provide relevant, topical information for students. Finally, Click-and-Drag exercises help students actively demonstrate their understanding of the associated learning objectives. Application Exercises can be assigned as preparatory exercises due before class (this is especially good for flipped classrooms), or after class as concept comprehension checks. Applications Exercises will generally be assigned as homework or practice as part of the overall class grade. A general rule of thumb would be to make application exercises worth 5 to 10 points each since these require time and thought.

To find the Applications in Connect®, go to ―Add Assignment‖ and then select ―Question Bank.‖ Application Exercises are organized by chapter. Instructors have the option to select for one attempt only, but they may want to give students unlimited or multiple attempts on the first few assignments to give students a chance to learn and navigate the system. (As the course progresses, instructors may want to tighten up the time on task and reduce the number of attempts to complete each exercise).

Chapter quizzes and full chapter test banks are available for assignment, and like the Application Exercises, are organized by chapter. The value applied to each question should be relatively low because numerous questions are usually assigned for each chapter. As such, make these questions worth 1 or 2 points each. The feedback given to students is time-flexible. Selecting feedback to be displayed after the assignment due date helps to keep students from giving the correct answers to other students while the questions are still available. For this reason, it is suggested that no feedback to quizzes and test bank exams be made available until after the assignment is due.

When should I assign these digital components?

To fully utilize the power of the digital components, instructors will often assign the SmartBook® reading and adaptive learning probes before class meets. Application Exercises can be completed either before or after class; if they are completed before class, they can sometimes serve as good springboards for class discussions. The chapter quiz makes a good check on comprehension of the material and may work best if assigned after each class period. The test bank serves as a good resource for building midterm or final exams.

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Strategic Management, 6e Teacher‘s Resource Manual More detailed information on SmartBook® and Connect® is available through several resources at McGraw Hill. A good starting point is your local Learning Technology Representative, who can be found here: http://www.mheducation.com/highered/platforms/connect/features-educators.html

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Strategic Management, 6e Teacher‘s Resource Manual

COURSE PREPARATION Helpful Suggestions Regarding Assignment Policies: Connect® gives instructors a wide array of flexibility in making assignments and creating grading policies. Instructors may choose to: 

assign as many assignments as appropriate given the level and time commitment expected for the class,



determine point values for each question/application that works within the total course percentages,



make available multiple attempts per assignment with options of accepting the highest score or averaging all the attempts together (several attempts are particularly good for homework assignments),



deduct points for late assignment submissions (percentage deduction per hour/day/week/etc.) or create hard deadlines thus accepting no late submissions,



show feedback on application/questions immediately upon submission or at the time the assignment is due for the whole class, create new assignments or questions from scratch, or edited versions from a variety of provided resources.

Throughout the TRM for each chapter, we will integrate materials from the Lecture PowerPoint slides, Supplemental Lecture slides, Connect® Application Exercises, and MiniCases. This integration of resources will allow for a cohesive presentation of the relevant resources at your disposal, helping you to convey these topics effectively and efficiently to your students.

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Strategic Management, 6e Teacher‘s Resource Manual

CHAPTER 2 Learning Objectives LO 2-1 Explain the role of strategic leaders and what they do.

LO 2-2 Outline how you can become a strategic leader.

LO 2-3 Compare and contrast the roles of corporate, business, and functional managers in strategy formulation and implementation.

LO 2-4 Describe the roles of vision, mission, and values in a firm‘s strategy.

LO 2-5 Evaluate the strategic implications of product-oriented and customer-oriented vision statements.

LO 2-6 Justify why anchoring a firm in ethical core values is essential for long-term success.

LO 2-7 Evaluate top-down strategic planning, scenario planning, and strategy as planned emergence, identifying the pros and cons of each.

LO 2-8 Explain the causes of strategic dissonance and how to navigate strategic inflection points.

LO 2-9 Describe and evaluate the two distinct modes of decision making.

LO 2-10 Compare and contrast devil‘s advocacy and dialectic inquiry as frameworks to improve strategic decision making.

In this chapter, we examine the role of strategic leaders in the creation of competitive advantage. We will investigate the daily activities and capabilities of strategic leaders. We will cover how they guide the strategy process across different layers of large organizations. We will investigate the need for an organization to define its vision, mission and values as the first step in the strategic management process.

We will also spend some time on three different frameworks used to develop strategy. We discuss each framework‘s pros, cons, and the best environments where they can be applied. Next, we will explore two distinct types of strategic decision making. Finally, we will discuss the implications for leaders in enacting a well-designed strategic management process.

A chapter opening case on Facebook‘s transition into Meta and two strategy highlights are included in the chapter for tangible applications of the theoretical frameworks discussed.

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Strategic Management, 6e Teacher‘s Resource Manual

Text Chapter Contents ChapterCase 2: Facebook Becomes Meta 2.1 Strategic Leadership (LO 2-1, LO 2-2, LO 2-3) CONNECT® INTEGRATION Case Analysis: Strategic Leadership: Formulating Strategy Across Levels CONNECT® INTEGRATION Multiple Choice: The Role of a Strategic Leader 2.2 Vision, Mission, and Values (LO 2-4, LO 2-5. LO 2-6) Strategy Highlight 2.1: Teach for America: Inspiring Future Leaders CONNECT® INTEGRATION Whiteboard Video: The Role of Mission, Vision, and Values in Strategic Management CONNECT® INTEGRATION Matching: Strategic Implications of a Vision Statement CONNECT® INTEGRATION Multiple Choice: Ethical Core Values 2.3 The Strategic Management Process (LO 2-7) Strategy Highlight 2.2: Starbucks CEO: “It’s Not What We Do” CONNECT® INTEGRATION Case Analysis: Planned Emergent Strategy at 3M CONNECT® INTEGRATION Video Case: Putting Strategic Planning into Practice at HumanGood

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Strategic Management, 6e Teacher‘s Resource Manual 2.4 Strategic Decision Making (LO 2-8, LO 2-9, LO 2-10) CONNECT® INTEGRATION Multiple Choice: Strategic Decision Making 2.5 Implications for Strategic Leaders ChapterCase 2 / Part II CONNECT® INTEGRATION Comprehension Case: ChapterCase—Facebook Becomes Meta

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Strategic Management, 6e Teacher‘s Resource Manual

Chapter Teaching Resources SECTION

Title

RESOURCE TYPE

CHAPTERCASE 2

Facebook Becomes Meta Facebook Changes Company Name to Meta

Web Video Interview

What Is a Leader?

Stanford Video

―Performance with a Purpose‖

Fortune Video Interview

Ethical/Social Issues: FB Leadership

TRM Extra

Strategic Leadership: Formulating Strategy Across Levels

Connect® Case Analysis

The Role of a Strategic Leader

Connect® Multiple Choice

MiniCase 2: Microsoft: Satya Nadella Hits Refresh

Rothaermel Textbook

Leadership in Focus

Stanford Resources

Strategic Implications of a Vision Statement

Connect® Matching

Small Group Exercise: Non-Profit Vision Statements

TRM Extra

Ethical Core Values

Connect® Multiple Choice

The Role of Vision, Mission, and Values in Strategic Management

Connect® Whiteboard Video

Ethical/Social Issues: Vision/Mission Statements

TRM Extra

Small Group Exercise: Black Swan responses

TRM Extra

Planned Emergent Strategy at 3M

Connect® Case Analysis

2.1: Strategic Leadership

2.2: Vision, Mission, and Values

2.3: The Strategic Management Process

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Strategic Management, 6e Teacher‘s Resource Manual Putting Strategic Planning into Practice at HumanGood

Video Case

Small Group Exercise: Planned Emergence Thought Experiment

TRM Extra

MiniCase 2: Microsoft: Satya Nadella Hits Refresh

Rothaermel Textbook

Shell‘s New Lens on the Future

Shell Corporation Website

2.4: Strategic Decision Making

Strategic Decision Making

Connect® Multiple Choice

2.5: Implications for Strategic Leaders

The Role of a Strategic Leader

Connect® Multiple Choice

Good to Great Video

Nordic Business Forum

ChapterCase: Facebook Becomes Meta

Connect® Comprehension Case

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Strategic Management, 6e Teacher‘s Resource Manual

Overview of the Chapter 2.1

Strategic Leadership Strategic leadership pertains to an executive‘s use of power and influence to direct the activities of others. The skills, activities and insight determine the success or failure of leaders and the companies that they lead. Exhibit 2.1 depicts how CEOs spend their days. In answering the question how a person becomes a strategic leader, upper-echelons theory asserts that effective leadership is the result of innate abilities and training. Exhibit 2.2 details the different capabilities of leaders on the Level-5 Pyramid. Critical to strategic formulation and implementation involves an understanding of the questions that must be answered at the corporate, business, and functional levels. The ChapterCase explores the Strategic Leadership of Mark Zuckerberg and Sheryl Sandberg at Facebook.

2.2

Vision, Mission, and Values The first step in the strategic management process is to define the vision, mission, and values of an organization. The first two can be thought of as answering the ―what‖ and ―how.‖ The third explores the social framework that governs the first two. Strategy Highlight 2.1 discusses how Teach For America pursues an inspiring vision. Vision statements can either be customeroriented or product-oriented. Sustained competitive advantage is more likely to be created in the customer-oriented environment. While mission statements often express lofty goals, to achieve competitive advantage, a company‘s commitments must be guided by the fundamentals of value creation. Finally, it is imperative that strategic leaders set the example by living their firm‘s core values.

2.3

The Strategic Management Process This section deals with three approaches to the strategic management process – top-down strategic planning, scenario planning, and strategy as a planned emergence. The top-down approach derives from military strategy. This approach assumes that the future can be predicted from the past. Unforeseen events can make the most carefully developed plans obsolete. In scenario planning, a firm‘s leaders develop different scenarios to anticipate plausible futures.

Exhibit 2.7 shows the feedback loop required to adapt the AFI Framework in a scenario planning environment. The scenario planning approach still suffers from the black swan event—dealing with the impact of a highly improbable event. However, by having considered a range of scenarios, the organization may have created the capabilities and flexibility to quickly respond to the unexpected. The final approach seeks to combine a top-down intended strategy with a bottom-up emergent strategy. Exhibit 2.8 illustrates this approach within the AFI Framework.

The concept of an emergent strategy describes an unplanned strategic initiative developed within the organization. The origins of such initiatives may be autonomous actions, serendipity, or resource-allocation processes. Exhibit 2.9 summarizes these three approaches in a compare and contrast format.

2.4

Strategic Decision Making 6

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Strategic Management, 6e Teacher‘s Resource Manual When a firm‘s static fit no longer matches competitive realities, strategic dissonance emerges.

This dissonance stems from the misfit between a firm‘s current strategy and a changing competitive environment and can signal that the firm is at a critical junction where dramatic changes are about to occur. This strategic inflection point is a moment when the fundamentals of a business and its industry are about to change. Addressing these strategic inflection points is a difficult leadership challenge that can require deep changes to firms‘ existing strategies.

In order to understand how leaders respond to these challenges, we need to better understand decision-making. We like to believe we make rational decisions based on data and facts.

However, the theory of bounded rationality suggests that we tend to satisfice rather than optimize. Said another way, cognitive limitations lead us to choose the “good enough option.”

Strategic decisions are frequently made using rules of thumb—much of the problem relates to a wealth of information but a scarcity of attention. Using the lens of theory and frameworks on this information allows managers to make better, faster strategic decisions. Exhibit 2.11 describes the attributes and likely results of two systems of decision making that have emerged from research in behavior economics. The key advantage of System 2 or slower process, comes from reducing the likelihood of cognitive biases.

The section concludes with two methods to improve strategic decision making: Devil’s Advocacy and Dialectic Inquiry. These are examined in Exhibit 2.12 and 2.13 respectively. Under the first approach, a single course of action is generated and then critically reviewed by an independent team. In the Dialect Inquiry approach, the two separate teams develop an independent course of action—this approach tends to promote a broader examination of alternatives.

2.5

Implications for Strategic Leaders Strategic leaders are those executives whose vision and decisions enable an organization to create or sustain a competitive advantage. These leaders must develop and follow an effective strategic management process that can respond with strategic flexibility to meet changing customer needs and the external environment. They must create a culture in which all employees feel invested in and inspired by the firm‘s vision and mission. The executives must understand and incorporate the processes and interdependencies described in the AFI Framework. The strategic leaders must use the information available to make effective decisions.

Classroom Outline ChapterCase 2 Facebook Becomes Meta The opening ChapterCase discusses the fact that following Facebook‘s announcement that it would become Meta, it lost $550 billion in its stock market valuation (approximately 50% of its entire value).

Did Mark Zuckerberg and the other strategic leaders at Facebook make the right decision?

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Strategic Management, 6e Teacher‘s Resource Manual

STRATEGY SMART VIDEO EXAMPLE INSTRUCTOR SUPPLEMENT SLIDE 17 A three-minute video about the small businesses that use Facebook to grow their business, Sandberg on boosting jobs with Facebook.

ChapterCase 2 Part II The closing ChapterCase provides extended information on the Meta‘s name change and their current performance and reputation crisis.

ChapterCase 2 Discussion Questions 1. What challenges (as detailed in ChapterCase 2 Part 1 and Part II) is Meta Platforms facing? How should Mark Zuckerberg deal with each of them? List the challenges and make specific recommendations for addressing them.

Based on the ChapterCase, many of the problems challenging Meta arise from privacy concerns within the user community and throughout society in general. In addition to changing their strategic focus to the metaverse, Meta is still dealing with several crises that predate the name change. The Sandberg-led initiative to combat slowing growth focused on greater engagement with the advertising community.

However, the expansions of for-fee services to advertisers have resulted in situations in which outside organizations, e.g., Analytica (aka Cambridge Analytica), have been able to access private data without the knowledge or consent of users; users have fallen victim to a spate of ―fake news‖ postings substantially undermining the confidence in new content; and the company possibly inadvertently abetting the attempts of foreign organizations to impact the U.S. election cycle. Recently, whistle blowers have directed attention to the harmful effects of Meta‘s products and services on children and teenagers. In order to resolve these challenges, Meta needs to re-establish the confidence of its user community while maintaining or evolving its revenue model.

2. Compare and contrast the strategic leadership of Mark Zuckerberg and Sheryl Sandberg (who stepped down as Meta‘s COO in 2022, while remaining on the board of directors). Which qualities for each strategic leader stand out to you, and why? Where would you place each individual on the Level-5 pyramid for strategic leaders (see Exhibit 2.2), and why? Is either of them an effective strategic leader? Explain your answers.

Students may well disagree on this question, but one could argue that Mark Zuckerberg places on level three of the pyramid: Competent Manager. In the early days of Facebook he assembled an extraordinary team of developers who were able to deliver features and functions rapidly which attracted the large user base. The addition of Sheryl Sandburg, arguably an Effective Leader (Level 4) brought the vision and mission focus needed to achieve superior performance, e.g., monetization of the platform. A key 8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual question remains whether Zuckerberg has the leadership ability to continue to steer Meta amidst its many crises and growing criticism.

3. Given an alleged leadership crisis at Meta Platforms, should Mark Zuckerberg be replaced? Why or why not? Explain your answers.

This is a discussion that covers the current problems regarding issues of privacy of user data and the evolution of the ―news delivery‖ aspect of the platform. In order to achieve a sustained competitive advantage in the current environment, Facebook must be able to assure users that their privacy is not being compromised, that they can have a level of ―trust‖ on the accuracy of information presented on the platform and that Facebook can achieve these trust objectives while maintaining (expanding) the company‘s revenue growth. It can be argued that Zuckerberg has been tainted by past pragmatic decisions.

DISCUSSION TOPICS Facebook has taken the whole issue of ―fake news‖ and foreign backed election related news and events much more seriously now that the company found evidence of Russian groups using the platform to set up over 60 protests on both sides of divisive issues leading up to the 2016 U.S. presidential election.

(See WSJ ―Russian-Backed Facebook Accounts Staged Events Around Divisive Issues,‖) Facebook, along with Google and Twitter testified to the U.S. Congress in fall 2017 about Russian election related activity on their digital platforms. (See WSJ article ―Tech Giants Disclose Russian Activity on Eve of Congressional Appearance.‖) Conclusive actions are still under consideration by the firms and also the U.S. government in moving forward to prevent or mitigate foreign intrusion in future U.S. elections.

Facebook CEO Zuckerberg has appeared before Congress again in 2019. In October he was supposed to discuss the firm‘s move into cryptocurrency (Libra) but many of the Congressional questions were still related to privacy and fake news issues which continue to afflict the firm. (See WSJ article ―Facebook‘s Zuckerberg Faces Lawmakers Over Cryptocurrency.‖)

2.1 STRATEGIC LEADERSHIP LO 2-1 Explain the role of strategic leaders and what they do.

LECTURE SLIDES 3–14 EXAMPLES You may want to open the topic of strategic leadership with a discussion about what a leader is. A video case that could be used to start that discussion is ―What Is a Leader?‖ with Col. Gayle Colvin, U.S. Air Force, from Stanford Leadership in Focus.

Indra Nooyi, CEO of PepsiCo explains her passionate and personal reasons for driving the ―Performance with a Purpose‖ strategy in this three-minute video interview. With respect to the Level-five pyramid of strategic leadership, she would be located at or very near the top of it. Nooyi has proven to have superior interpersonal, informational, and decisional skills. She has also proven to be capable not only of guiding a company the size of PepsiCo for over a decade, but also of steering it toward a significantly different 9 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual goal and convincing the organization to follow through by guiding with example and conviction.

(Strategy Highlight 5.1 covers this topic also as part of the discussion on triple bottom line leadership).

LO 2-2 Outline how you can become a strategic leader.

You may want to give the students a deeper understanding of what the Level-5 leadership pyramid means for their own careers. You might describe it thus: Taken together, you become an effective and ethical leader by sequentially mastering each of the five steps in the strategic leadership pyramid. Your training in college allows you to become a highly capable individual who can make productive contributions. If you take a first job immediately after your undergraduate degree, you will likely begin your corporate career in a functional area that was your focus or major in college (e.g., accounting, operations management, marketing, finance). As you move down the learning curve through group work in college and on-the-job training, you develop the ability to work effectively with others to achieve team objectives. With these skills, you move to Level-2 leadership. As responsibilities come to you, you will be able to develop and demonstrate the ability to organize resources efficiently and effectively to achieve strategic objectives. At Level 3, you have become an effective manager—someone who produces results. Levels 4 and 5 require a stronger element of strategic leadership than the prior levels.

When given the chance to work as a general manager (someone who has profit-and-loss responsibility for a unit or group), you will need Level-4 strategic leadership qualities. At Levels 4 and 5, you will have increasingly dramatic opportunities to put to use the AFI framework you‘ve learned from this book: You will need to be able to present a compelling vision and mission to inspire others to achieve superior performance. Doing so requires an intimate understanding not only of the inner workings of your company (Chapters 1 and 2), but also of the external environment. The internal and external analysis concepts (Chapters 3 and 4) will help you lay the foundation to formulate strategies that can improve firm performance (Chapters 5 through 7). Having produced results at the business level, you might be tapped as the CEO of the company. At Level-5 strategic leadership, you need to reconcile a strong will and work ethic (which got you to the top) with the humility to lead a company by example.

To do this effectively, you need a deep understanding of corporate-level strategy (Chapters 8 through 10) and organizational design (Chapter 11). You also will need to exhibit unfailing personal integrity (Chapter 12).

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 15 This slide links to a 2 ½ -minute video of Jim Collins discussing what defines a Level-5 leader: What defines a Level V leader?

Strategic leadership refers to the behaviors and styles of executives that influence others to achieve organizational goals. The three roles of a leader are interpersonal, informational, and decisional.

According to the upper-echelons theory, organizational outcomes including strategic choices and performance levels reflect the values of the top management team (the individuals at the upper echelons, or levels, of an organization). The theory states that executives interpret situations through the lens of their unique perspectives, shaped by personal circumstances, values, and experiences. The Level-5 leadership pyramid (Exhibit 2.2) is a conceptual framework that shows leadership progression through

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Strategic Management, 6e Teacher‘s Resource Manual five distinct, sequential levels. Jim Collins in Good to Great found that all the companies he identified as great were led by Level-5 executives.

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for information on for discussion on issues facing leaders in many firms today.

LO 2-3 Compare and contrast the roles of corporate, business, and functional managers in strategy formulation and implementation.

INTEGRATION Case Analysis: Strategic Leadership: Formulating Strategy Across Levels This case analysis activity starts with a brief case using IBM as an additional example of the different levels of strategy. This complements the book‘s discussion. The student must read the textbook and also the case provided here. Then, the student will answer related questions following the case. 



Difficulty: Medium Blooms: Apply

INTEGRATION Multiple Choice: The Role of a Strategic Leader This multiple-choice exercise explains the role of the strategic leader in the overall success of an organization and demonstrates the key behaviors needed to become one. The goal of the exercise is to demonstrate an understanding of why some strategic leaders are successful and why some are not.  

Difficulty: Medium Blooms: Apply

2.2 VISION, MISSION, AND VALUES LO 2-4 Describe the roles of vision, mission, and values in a firm‘s strategy.

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Strategic Management, 6e Teacher‘s Resource Manual Building a great company has some similarities to building a great house. Using this analogy to start the chapter should resonate for many students. It is a helpful way to introduce the idea of vision and yet still tie it to something tangible that must be implemented (building that great new home).

EXAMPLES Stanford University‘s Leadership in Focus center offers great materials for the classroom. Although the emphasis is on leadership and organizational behavior, several of the cases are well suited to a strategy course. One option that fits in well in this section is a video case of Roger Deromedi, former Kraft CEO, describing the process of developing a vision for the firm. (The URL is https://www.leadershipinfocus.net/presentations/212/play/. It includes suggested discussion questions.)

DISCUSSION TOPICS Chinese companies such as Alibaba, BYD, Tencent, and Lenovo aspire to world leadership. These companies set their ambitious goals when they were only a fraction of the size of the companies they were chasing. Indeed, they were so small that initially the market leaders did not even recognize them as potential competitors; many had never competed outside their domestic markets. Yet all made global leadership their mission, with goals so ambitious they exceeded the firms‘ existing resources and capabilities by a large margin. Ask students to identify what challenges these firms needed to overcome and how they might measure success.

INTEGRATION Multiple Choice: Ethical Core Values This exercise addresses the need for corporate social responsibility when conducting a stakeholder impact analysis. The goal of this exercise is to recognize how companies can practice different forms of social responsibility.  

Difficulty: Medium Blooms: Apply

INTEGRATION Whiteboard Video: The Role of Vision, Mission, and Values in Strategic Management This video reviews the roles of vision, mission, and values in the strategic management and decision processes. The goal of this activity is to demonstrate your understanding of the elements that factor into the strategic decision process.  

Difficulty: Medium Blooms: Apply

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Strategic Management, 6e Teacher‘s Resource Manual

INTEGRATION Matching: Strategic Implications of a Vision Statement This exercise compares and contrasts the strategic implications of product-oriented and customeroriented vision statements and how a compelling vision statement can lead to organizational success.  

Difficulty: Medium Blooms: Apply

Strategy Highlight 2.1 Teach for America: How Wendy Kopp Inspires Future Leaders Click here for a summary of the Strategy Highlight covering the role of the vision of Teach for America.

INSTRUCTOR SUPPLEMENT SLIDE 5: TEACH FOR AMERICA: HOW WENDY KOPP INSPIRES FUTURE LEADERS

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity around a discussion of vision statements in nonprofit organizations.

LO 2-5 Evaluate the strategic implications of product-oriented and customer-oriented vision statements.

Although a product-centric view can potentially limit a company‘s strategic options, it can also help a company to refocus. Shell Canada provides an example of how dealing with the question, ―What are we about?‖ led to a refocusing of the company and as a consequence, superior performance. Although the majority owner was Royal Dutch Shell, Shell Canada was more or less independent; its shares were traded on the Toronto Stock Exchange. In the 1980s, Shell Canada was a widely diversified business with interests not only in oil and gas exploration and distribution, but also in activities ranging from chemicals to forestry. Although it had performance comparable to the industry average, Shell Canada‘s executives began to focus on the firm‘s mission during this time. After some soul searching, the company‘s managers realized that Shell Canada was at its heart a low-cost producer of oil and gas. With 13 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual this new clarity of mission, Shell Canada began to sell off its peripheral businesses to refocus on oil and gas. By refocusing on oil and gas, Shell Canada was able to apply its core competency to increase the value created for customers, and to do this at a low cost. Its mission statement helped Shell Canada focus on the activities that yielded the greatest returns.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 19 This slide links to a less than three-minute video of several well-known brands and their respective vision statements. Inspiring Mission statements.

LO 2-6 Justify why anchoring a firm in ethical core values is essential for long-term success.

DISCUSSION TOPICS What responsibility do lower-level executives at Enron bear for not reporting questionable practices by the firms‘ leadership? Why do you think only one employee initially came forward to report the irregularities and help with the investigation? Lower-level executives have an ethical responsibility to report questionable practices, beginning by questioning the authority, and moving outside the company if necessary. We don‘t know how many employees really knew about the fraud underway at Enron versus how many ―just heard rumors.‖ Still with over 20,000 employees at Enron, and another 30,000 at Arthur Anderson, it is clear some people knew and did nothing about it. Whistle-blowing is a difficult choice and there are many factors to consider, but the fact that so few came forward says that the actions were in alignment with the values and culture of the firm actually practiced, even if it was at odds with their stated values.

NOTE: If you‘re looking for some supplemental material, there‘s a fantastic podcast episode that explains the Enron scandal: You‘re Wrong About: Enron (warning: there‘s some cursing in each episode, but Michael Hobbes and Sarah Marshall are journalists who manage to provide a wellresearched and easily understood explanation of some tough topics).

EXAMPLES You might want to use an example to show that firms with lax ethical values hurt more than their shareholders. Using a giant Ponzi scheme, Bernie Madoff, with the help of several employees in his investment securities firm, defrauded high-profile institutional and individual investors such as the bank HSBC, Banco Santander, Human Rights First, the International Olympic Committee, film producer and CEO of DreamWorks Animation Jeffrey Katzenberg, actor Kevin Bacon, and Nobel Peace Prize winner Elie Wiesel. Madoff‘s fraud totaled an estimated $65 billion. He was sentenced to 150 years imprisonment and fines of more than $170 billion. (―Q&A on Madoff Case.‖) Businesses also have an ability to influence the ethical decisions of other organizations. The recent FIFA scandal offers a great example of this. Corporate sponsors of football (soccer) had not taken action during years of rumors of FIFA corruption, but in 2015 that changed. Coca-Cola, Emirates, Sony, and other firms have used their sponsorship dollars to make a statement about ethics and integrity. (See 14 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual ―FIFA Corruptions Scandal Pressures Soccer Governing Body‘s Sponsors,‖ The Wall Street Journal, May 31, 2015.)

A Stanford University video case addresses making ethical decisions. Michael Marks, former Chairman and CEO of Flextronics discusses such a decision in ―Right, Wrong, or Just Business?‖

2.3 THE STRATEGIC MANAGEMENT PROCESS LECTURE SLIDES 26–39 LO 2-7 Evaluate top-down strategic planning, scenario planning, and strategy as planned emergence.

EXAMPLES Top-down strategic planning is typically performed by senior managers and strategy specialists on a 3or 5-year cycle. The output is usually a detailed book (or PDF file these days) with analysis of current positions and plans for future growth. In scenario planning, critical elements are to create a diverse set of ―what if‖ plans in the formulation stage and then to drive forward with a dominant strategic plan in the implementation phase. Planned emergence is the less formal process that tends to emerge from the ―bottom-up‖ of the organization. The Mintzberg framework reflects the strategy that it may be driven from the top or the bottom of the organization. Exhibits 2.5 and 2.6, show how the AFI framework overlays on the top-down and scenario planning processes respectively. This provides an opportunity to walk through the strategy-making process.

To conduct successful scenario planning, managers need current information. The network-equipment giant Cisco Systems has invested huge sums in technology to generate just this kind of data. Cisco‘s senior executives can track daily customer order data from its sales teams around the globe with up-tothe-minute accuracy. Walmart‘s retired CEO Mike Duke indicates that he too was using real-time sales data tracking, enabling top executives to monitor daily sales of each of the over 8,500 Walmart stores worldwide in real time. With these real-time data systems, managers can identify emerging trends in each region and market segment long before they materialize in financial data. This in turn allows them to fine-tune their functional strategy with unprecedented accuracy and speed.

An unexpected event at the largest rail carrier in the world, Japan Railways, led to diversification from railroads into bottled water using an emergent strategy. Japan Railways was constructing a new bullet train through the mountains north of Tokyo, requiring many tunnels. In one of the mountains, persistent flooding caused huge problems. Engineers responded by drawing up complex plans to drain the water.

Meanwhile, workers inside the tunnel were making good use of the water—they were drinking it. A maintenance worker suggested the water should not be pumped away but rather bottled and sold as premium drinking water because it tasted so fresh. Its source was snowpack, purified and filtered in the slow percolation process through the mountain‘s geological layers and enhanced on the way with healthy amounts of calcium, potassium, and magnesium. Eventually, Japan Railways set up vending machines on 1,000 railroad platforms in and around Tokyo, and home delivery of water, juices, and coffee followed. The employee‘s proposal had turned an expensive engineering problem into a multimillion-dollar business. Because Japan Railways was willing to define its business as broader than just being in railroads, it was able to capture the emergent strategy and diversify into drinking water. In contrast, given its product-oriented vision to be the safest, most progressive North American railroad, it 15 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual is doubtful that CSR Railroad would have reacted in a similar fashion had it encountered the same serendipitous event.

A functional manager at IBM suggested entry into the emerging life sciences field. She saw a business opportunity for IBM, in which application of high-performance computing and information technology could solve thorny problems that accompanied data-intensive work such as decoding human genomes and furthering personalized medicine. IBM‘s general and corporate managers supported this strategic initiative, dubbed ―information-based medicine.‖ This new business opportunity generated more than $5 billion in revenue a few years later.

Patsy Sherman—Scotchgard—3M: In 1953 researchers at 3M were working with fluorocarbons to be sold as coolant liquid in air conditioning equipment. One of the researchers noticed, after accidentally spilling some coffee on her shoe, that the residue of fluorocarbons turned the coffee into small beads of liquids without staining. After observing this unique experiment Sherman contacted the chemist Sam Smith, and together they began developing a product that could actually repel oil, water, and other residues from fabric. In 1956 the Scotchgard protector was launched. What skills are needed to go from a coffee spill to an idea for a commercial product to meet a consumer need? You might discuss the role of absorptive capacity, deep understanding of customer needs, or intuitive thinking.

DISCUSSION TOPICS Scenario planning may become more widely used going forward if the economic, political, and technological forces keep changing rapidly. The global power shift from the West toward Asia would make a good discussion that ties sociopolitical uncertainties to scenario planning. The Russian invasion of Ukraine, COVID-19, and shifts in labor relations (the move towards unionization) may be other interesting topics.

Working professional students may find the growth in the supply of shale gas to be an interesting area of analysis. Some major areas of uncertainty are (1) whether or not the United States will allow natural gas to be exported to increase demand and (2) the extent to which environmental concerns for freshwater aquifer contamination or earthquake inducement may limit supply. This discussion creates four different scenarios in a 2x2 matrix with different supply/demand balances. Teams could be assigned one of the four quadrants and asked to develop implications for multiple supporting industries (chemical manufacturing, energy-intensive manufacturing, gas transportation, etc.), as well as the gas production firms.

INTEGRATION Case Analysis: Planned Emergent Strategy at 3M This case and multiple-choice question activity builds student comprehension of the planned emergence form of strategy by examining a case about the development of Post-It Notes by 3M Corporation. The 16 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual student must read the case provided, as well as the relevant textbook section, and answer the related questions in this exercise.

Follow-Up Activity: The instructor can expand on the concepts from this case analysis by having students discuss another example of this strategy formation process—this one concerning Starbucks in Strategy Highlight 2.2. There are similarities in corporate culture and personal persistence that are present in both applications of this concept. Class or small group discussions can also be created around the similarities and differences in the three approaches to strategy: strategic planning, scenario planning, and planned emergence. What would the development of Post-It Notes or Frappuccino have looked like using one of the other two approaches?  Difficulty: Medium  Blooms: Evaluate

INTEGRATION Video Case: Putting Strategic Planning into Practice at HumanGood This case and multiple-choice question activity shows students that strategic planning is important, but putting it into practice can be challenging. The case follows HumanGood, one of the largest owners and operators of senior living communities, and shows how the company‘s plan can evolve and change over time.  

Difficulty: Medium Blooms: Analyze

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity around a discussion that covers black swan events.

INTEGRATION Multiple Choice: Strategic Decision Making This animated video covers reviews the roles of vision, mission, and values in the strategic management and decision processes. Climbing Mount Everest is a key example discussed as an application of mission, vision, and values.

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Strategic Management, 6e Teacher‘s Resource Manual  

Difficulty: Medium Blooms: Apply

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Strategic Management, 6e Teacher‘s Resource Manual

Strategy Highlight 2.2 Starbucks CEO: “It’s Not What We Do” Click here for a summary of the Strategy Highlight covering the use of emergent strategy at Starbucks.

INSTRUCTOR SUPPLEMENT SLIDE 6: STARBUCKS CEO: “IT’S NOT WHAT WE DO” DISCUSSION TOPICS There are two key points we like to bring out about in this Strategy Highlight. The first is what type of risks was the store manager taking to offer a drink on the menu after it had been turned down by the executive committee? In some organizations, this would be cause for termination. So not only was the store manager relentless in pursuit of the idea, she may have been putting her job on the line. Second is the idea that the organization must be willing to accept ideas that ―emerge,‖ and implement them even if they were not driven by senior leadership. Ask students what conclusions they might draw about how firm culture and processes for experimentation and decision-making authority may impact firm innovation.

Additionally, MiniCase 2: Microsoft: Satya Nadella Hits Refresh is a good way to update a discussion of Microsoft and how it is operating under the new leadership of Satya Nadella. Every MiniCase has assignable McGraw Hill Connect® case questions available

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity about distributed idea generation, a method to encourage emergent ideas from an organization.

CLASS EXERCISE Shell predicts that in 2025 most of our energy will continue to be generated from fossil fuels but 20 percent will come from alternative energy sources like wind, solar, and hydropower. Given Shell‘s past success in using scenario planning, one ought to pay attention to its predictions. Shell can claim several accurate predictions to its credit. In the 1960s, with the price of a barrel of crude oil around $10 (compared to a record high of close to $150 in the summer of 2008), managers at Shell began to formulate strategic plans for a future with a strong OPEC (the cartel of oil-exporting countries) and an accompanying drastic rise in oil prices. When the price of crude oil suddenly surged to over $80 a barrel in the late 1970s, Shell was well-positioned to take advantage of this new situation; other oil companies were scrambling to adjust. Shell activated one of its alternative strategic plans that detailed how to 19 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual obtain crude oil from North Sea drilling, to which the firm had already secured the rights. In the early 1980s, Shell made strategic preparations to take advantage of another apparently far-fetched scenario when it speculated that communism might fail, bringing down the powerful Soviet Union and ending Soviet artificial restrictions on the supply of natural gas. More information is available on Shell‘s website on the process of scenario planning, its past scenarios, and its projections on renewable energy adoption. Shell‘s scenarios (Shell‘s New Lens on the Future) envision the world as it might be in 2100.

You might ask small teams of students to brainstorm the implications that these two scenarios have for industries other than the energy industry. For example, the automotive and passenger airline industries are strongly impacted by both fuel supplies/pricing and air quality controls. Other new scenarios focus on envisioning the cities of the future, which might have broader appeal to your students and a global perspective from Los Angeles to Marrakesh, Chongqing, Manila, and Copenhagen.

2.4 STRATEGIC DECISION MAKING LECTURE SLIDES 40–46 LO 2-8 Explain the causes of strategic dissonance and how to navigate strategic inflection points.

One things students will recognize is the changing nature of business environments. One way that might be salient with students is to discuss the changing popularity/trendiness of social media outlets.

Facebook/Meta, Instagram, Twitter, and TikTok have user bases that have changed dramatically in a short amount of time. This introduction will be a good opportunity to pull the ChapterCase 2 information into the discussion. Understanding the challenges that Zuckerberg faces may make it more understandable as to why he is currently focused on the Metaverse. As strategic leaders face these changing environments, they must make decisions of how to proceed. This will provide a good transition into the different types of decision making.

LO 2-9 Describe and evaluate the two distinct modes of decision making.

In the Chapter Overview, these two modes of decision making were given the short-hand descriptions of ―Fast‖ vs ―Slow,‖ in which the second method tended to analyze more data and potentially reduce the impact of cognitive biases. As we dig deeper into these two methods, some items from broader discussion include: 1. The perception that all ―important‖ decisions should be aligned with the ―Slow‖ method. A historical counter-example can be found in the ―Tylenol crisis‖ of 1982. At the time, the Johnson and Johnson product had 37% market share of non-aspirin OTC pain killers. Within days of an outbreak of cyanide poisoning ultimately linked to Tylenol capsules, the company had stopped all production, funded a $100,000 reward for the killer and recalled all Tylenol capsules. ThenCEO James Burke proclaimed that the decision was predicated on the company‘s credo of the responsibility to the customer.

2. The understanding of the cognitive biases that exist in decision making, but can be mitigated through the second mode (a/k/a ―Slow‖).

Examples of these biases include: 20 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual      

Illusion of Control – overestimate of the ability to control events.

Escalating Commitment – frequently called “doubling down” – but also a case of ―throwing good money after bad.‖ Confirmation Bias – searching for information that confirms existing beliefs while discounting or ignoring contrary data.

Reason by Analogy – comparing a complex problem to something familiar without adequately examining the differences.

Representativeness – drawing conclusions based on a small set of information without exploring the ways in which the sample differs from the population.

Groupthink – the situation where opinions coalesce around a leader without critical evaluation by individuals.

For group discussion, examine how issues of these cognitive biases play out in ―corporate‖ decisions.

LO 2-10 Compare and contrast devil‘s advocacy and dialectic inquiry as frameworks to improve strategic decision making.

The concept of ―devil‘s advocacy‖ intentionally sets up a second person or team to challenge the ideas of a primary team. They thus ―advocate‖ for a change. Many times there is a process to reach agreement by both teams therefore pulling the best of both groups into a final solution. In the dialectic inquiry which evolves out of the philosophy of Plato and is specifically designed to avoid the bias of Groupthink, two teams develop competing courses of action. The two teams compete for the ―winning approach‖ with senior leaders of the organization.

2.5 IMPLICATIONS FOR STRATEGIC LEADERS INSTRUCTOR SUPPLEMENT SLIDE 8 The chapter has provided several examples of strategic leadership actions taken at several major corporations. Such leadership when combined with an effective process of managing strategic issues can yield a sustained competitive advantage. Leaders need to consider the relative pace of change impacting the organization as well as stakeholders in designing a successful strategic management process.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 14 This slide links to a 2-minute video of Jim Collins describing his 25 years of research in contrasts looking for what makes organizations great in all types of situations. Good to Great Video

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Strategic Management, 6e Teacher‘s Resource Manual

Strategy Highlights Strategy Highlight 2.1 Teach for America: How Wendy Kopp Inspires Future Leaders In this strategy highlight, education is a subject most students will readily relate to. An example of an organization with an inspiring vision is Teach for America. While some question the long-term effectiveness of Ivy League students teaching in blighted urban areas or impoverished rural areas for two years, there is no doubt that the organization is quite successful in terms of its ability to recruit a large pool of applicants each year and to generate passion. One of the interesting notes at the website is that the program has over 62,000 alumni and some 80 percent remain in careers impacting lower income communities—these alumni are following careers not only in education but also in law, health care, nonprofit, or policy. Inspiring visions and missions (such as TFA‘s) provide intrinsic motivations for employees and customers alike.

Strategy Highlight 2.2 Starbucks CEO: “It’s Not What We Do” This strategy highlight discusses an example of an Emergent Strategy: Diana, a local store manager, held a firm belief that an iced drink had a place in the Starbucks menu. Despite a champion to present the idea to the executive committee, it was firmly rebuffed. The local champion was undeterred and offered the drink on her store‘s menu. The product became the Starbucks Frappuccino. How is this an example of an Emergent Strategy and at what points could it have ―gone wrong?‖

INTEGRATION Comprehension Case: ChapterCase—Facebook Becomes Meta Here, we provide both Parts 1 and 2 of this case, accompanied by short-answer questions that students can complete and submit. Due to the nature of these open-ended questions, they require manual grading. 

Difficulty: Medium  Blooms: Apply

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myStrategy INSTRUCTOR SUPPLEMENT SLIDE 10: HOW MUCH ARE YOUR VALUES WORTH TO YOU? Here, we encourage the student to take what they have learned about competitive advantage and apply it to his/her personal career. Encourage students to spend a few minutes looking at themselves to discover their own competitive advantages.

1. Identify your personal values. How do you expect these values to affect your work life or your career choice?

These questions are meant to be personal, but we offer a few thoughts on them. Values should play some part, but they are not likely to be the most important influence. If your only goal is to become head of a large company, market growth and expansion may become a high priority. However, success can be found in many places, and it is usually more important to find a company with good leadership (firm effects) than to worry solely about market growth (industry effects).

2. How much less salary would (did) you accept to find employment with a company that is aligned with your values?

Studies have shown that once workers get above a certain ―pay the bills‖ space financially, intrinsic rewards often become more important than money. We have found a wide variance of answers when we have run this exercise in our classes.

3. How much are you willing to ―pay for pay‖ if your dream job is in management consulting or investment banking?

Encourage students to consider work/family life balance and recognize the implications of long hours and extensive travel that usually accompany high-paying jobs.

Discussion Questions 1. The chapter discusses several strategic leadership issues at Facebook. Several other firms are also noted in the chapter with some positive and some negative leadership results. Choose a firm mentioned in the chapter and discuss current controversial issues it faces. How should strategic leaders address the major issues you identified? In what situations is top-down planning likely to be superior to bottom-up emergent strategy development?

There are many organizations and industries that have little susceptibility to major disruptions. One example would be electric utilities such as Georgia Power. The majority of changes in year to year environment are fairly readily projected— changes in peak demand, utilization and supply costs can be predicted within tolerances. The need for updates to physical plant tend to follow predictable timetables.

However, even in these environments, wild cards do exist —consider the impact of wildfires on PG&E 23 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual in northern California or the power outages in Texas. Could better top-down planning have prevented PG&E from filing for bankruptcy in 2019?

2. This chapter introduces three levels appropriate for strategic considerations (see Exhibit 2.3). In what situations would some of these levels be more important than others? For example, what issues might be considered by the corporate level? How should the organization ensure the proper attention to each level of strategy as needed?

The ―Where, How, Implementation‖ questions can be quite useful to help students think about a particular strategic decision and which level of strategy it represents. A balance of the strategic levels is difficult and can be an area where many companies falter. In larger organizations, the strategic responsibilities will reside in different individuals and teams. This helps assure that no level is completely neglected, but it doesn‘t address the appropriate mix of strategic levels. Some organizations have implemented a periodic review of strategies at all levels of the firm to try to assess the health of the overall company and its business models.

Students may be more familiar with functional and business-level strategies from their own work experiences. Functional areas can develop many great ideas on how to implement business and corporate strategies. Given a supportive organizational climate, these areas can also produce emergent strategies. Relative importance is often based on external factors. When Lou Gerstner came to IBM and started to refocus the firm on services rather than hardware, the corporate strategy and transition was preeminent. Many of the business-level strategies—for example, in hardware-focused SBUs—were likely abandoned. On the other hand, when Microsoft rolls out Bing and partners with Facebook, Google‘s business-level strategies will be most important in figuring out how to compete in this changed online search environment 3. The ―job to do‖ approach discussed with the Clayton Christensen milkshake example can be useful in a variety of settings. Even when we are the customers ourselves, sometimes we don‘t look for better solutions because we get into routines and habits.

Think about a situation you sometimes find frustrating in your own life or one you hear others complaining about frequently. Instead of focusing on the annoyance, can you take a step back and look for the real job that needed doing when the frustration occurred? What other options can be developed to ―do the job‖ that may lead to less irritation in these situations?

Many firms are started because the founder saw a problem and a potential solution. Kinko‘s, Spanx and Uber are but three disparate examples. Students will often have complaints about traffic, parking, or cafeteria food. Each of these has potential to lead to new ideas. For example, E-scooters are one solution to try to help with a local traffic issue when the ―job‖ is to transport one person and a backpack to classes. Perhaps we don‘t need to bring the whole car just for that.

4. In what situations is top-down planning likely to be superior to bottom-up emergent strategy development? Please provide an example.

As the text notes, top-down strategic planning is usually best in relatively stable environments.

Emergent strategy is preferred in more uncertain times. However, the Mintzberg framework identifies 24 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual that combining the two approaches is likely to yield the best results. An organization in today‘s environment should strive to be flexible enough to adjust the proportion of top-down and bottom-up ideas based on the situation. Top-down planning and decision making may also be best in businesses in which reliability and consistency are key success factors. (Do you want your nuclear power plant operators experimenting with emerging ideas? Should auditors experiment with new accounting principles?) Bottom-up planning and decision-making offers advantages in innovation-based businesses where (1) being closer to knowledge of customer needs and competitive trends may create information advantages at lower levels of the organization and (2) a diverse stock of non-redundant knowledge may yield more radical innovations.

5. Several elements of strategic decision making are highlighted in this chapter. Think of an important decision a firm has recently faced and choose either devil‘s advocacy or dialectic inquiry to lay out some of the key factors the firm likely considered in making its decisions.

As one example you can structure with the class, Beyond Meat and Impossible Foods are both attempting to introduce plant-based alternatives to everyday meat products such as hamburgers and pork. One aspect of the introduction of pork products is a desire to gain a foothold in the Chinese market for pork dumplings. Recognizing that a major difference between the offerings of these two companies is the use of soy and GMO products, how might you structure a devil‘s advocate (or dialectic inquiry) analysis of the prospects in the Chinese market?

TRM Extra: Ethical/Social Questions This chapter discusses some key strategic leadership issues (such as privacy and fake news) facing Facebook leaders Sheryl Sandberg and Mark Zuckerberg. Consider other firms mentioned in the chapter such as Amazon, PepsiCo, Uber, VW, and Starbucks. What social and ethical issues do the leaders of these firms face today? Choose a firm or industry and explore the relevant controversial issues it faces. How should strategic leaders address the major issues you have identified?

Instructors may want to guide the students to a particular industry based on current events. Theranos‘s numerous ethical issues are discussed in the Chapter 12 case opener, and students may be familiar with it due to several documentaries, podcasts, and the TV series The Dropout. VW had large scandals surrounding software work arounds that were designed to generate higher miles per gallon results than their vehicles actually produced (a great Netflix series covers this story: Dirty Money – episode ―Hard NOx‖). PepsiCo and Starbucks must balance delivering cost effective products with sustainable suppliers and a greater awareness of healthy eating. Strategic leaders will address these types of issues rather than follow a tendency to ignore them until there is no other choice. Companies‘ responses to COVID-19 and the unionization efforts of Starbucks‘ employees may also be relevant current events to discuss.

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Strategic Management, 6e Teacher‘s Resource Manual

TRM Extra: Small Group Activities 1. Strategy Highlight 2.1 discusses the importance of the inspiring vision developed at Teach for America. In your group, search the internet for other nonprofit organizations (Red Cross, Habitat for Humanity, etc.).

1. Which of them has vision or mission statements that are appealing to donors, employees, and clients? Do these statements seem relevant in today‘s environment or are they outdated? What improvements can you create for these organizational statements?

If students are not familiar with nonprofit organizations you may want to offer Red Cross, The Humane Society (relevant to a Connect® chapter exercise) or Habit for Humanity as examples of national organizations. Ask the students to consider if the mission statement speaks to them or seems more like something their parents or grandparents might connect with.

2. The chapter includes a discussion of black swan events that were improbable and unexpected yet had an extreme impact on the well-being of individuals, firms, and nations. Nassim Nicholas Taleb, author of The Black Swan, has argued that policy makers and decision makers need to focus on building more robust organizations or systems rather than on improving predictions of events. This notion is reflected in the response to the predicted increase in powerful storms and storm surges. Hurricanes Katrina (which devastated New Orleans and parts of the Gulf Coast), Sandy (which wreaked havoc on the New York and New Jersey coasts), Harvey (which caused massive flooding in Houston), and Maria (which overwhelmed Puerto Rico), leaving much of the island without clean water and electricity for several months) have stimulated discussions about how to not only build a more resilient infrastructure and buildings, but also develop more flexible and effective responses.

2. Form small groups of three to four students. Search the internet on the following topic and debate your findings. For each group, search the internet for options and plans to (1) build more sustainable communities that would help areas cope with superstorms or droughts, and (2) organize responses to black swan events more effectively. Brainstorm additional recommendations that you might make to policy makers.

Major storms are a one key aspect of black swans; in the United States there have also been periods of drought causing problems in agriculture across the country and also massive wildfires, especially in the western United States. Students can reflect on how firms, governments and society can be more proactive in preparing for these sorts of natural events. Students are likely to be focused on stakeholders that they are personally connected to, so it may be a good exercise (and review of Chapter 1) to have them consider the various stakeholders affected by these events.

3. In many situations, promising ideas emerge from the lower levels of an organization, only to be discarded before they can be implemented. It was only extraordinary tenacity and disregard for the policy of selling only corporate-approved drinks that permitted the Frappuccino to ―bloom‖ within Starbucks (see Strategy Highlight 2.2).

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Strategic Management, 6e Teacher‘s Resource Manual Some scholars have suggested that companies set aside up to 2 percent of their budgets for any manager with budget control to be able to invest in new ideas within the company. Thus, someone with a $100,000 annual budget to manage would be able to invest $2,000 in cash or staff time toward such a project. Multiple managers could go in together for somewhat larger funds or time amounts. Through such a process, the organization could generate a network of ―angel investors.‖ Small funds or staff time could be invested in a variety of projects. Approval mechanisms would be easier for these small ―seedstock‖ ideas, to give them a chance to develop before going for bigger funding at the top levels of the organization.

3. What problems would need to be addressed to introduce this angel-network idea into a firm? Use a firm someone in your group has worked for or knows well to discuss possible issues of widely distributing small funding level approvals across the firm.

This exercise builds on some of the ideas applied in the Starbucks Strategy Highlight, combined with thoughts from Gary Hamel‘s book The Future of Management (Harvard 2007). It also integrates some of the real options concepts (real options is explained very well in CH 9.2), because these ―seeds‖ of funding spread throughout the organization will enable limited funding of many different ideas and give each project some time to get traction without it being a ―bet the business‖ decision.

Implementation ideas may take on many issues, depending on the student‘s prior work experience and knowledge. If the students are relatively young with limited work experience, it may be more fruitful to discuss a hypothetical company/department. You may even want to divide the class into smaller groups and hand them a departmental budget that you‘ve created – different groups of students will select to pull funding from different areas, and that can be a great start to the discussion. For example, where does the department manager take the 2 percent from the budget to invest it in these small-scale experiments? What if some managers want to invest and others don‘t? What sorts of controls would the firm have on the types of projects the employees could explore? Then there‘s the loss of control by the senior managers or finance, who have been approving all projects previously. At what point do these small projects need to get larger approvals within the organization? The mid-level manager should bring the idea to the attention of the top executives, ideally with a proposal of what would need to be changed as well as what it would offer. A good executive has to look at all possibilities for improving the company even if it requires significant change. Raise the issue of the importance of brand value and global brand image as a core competence of Starbucks, as a key success factor in the industry, and as the most valuable asset on the balance sheet. Encourage your marketing majors to explore the risks associated with independent, bottom-up experimentation with elements of strategy that have high brand impact. How might relationships with franchisees been harmed by offering products in companyoperated stores that were not available to partners?

Related MiniCase Instructors may want to consider assigning and discussing the following MiniCase, which covers topics found in this chapter. Every MiniCase has assignable McGraw Hill Connect® case questions available.

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Strategic Management, 6e Teacher‘s Resource Manual

CHAPTER 3

External Analysis: Industry Structure, Competitive Forces, and Strategic Groups Teacher Resource Chapter Contents Teacher’s Resource Manual (TRM): Implementation Guide

ii

Learning Objectives

1

Textbook Chapter Contents

2

Chapter Teaching Resources

3

Overview of Chapter

5

Classroom Outline

6

Strategy Highlights

19

myStrategy__________________________________________________ 20 Discussion Questions

21

TRM Extra: Social/Ethical Questions

22

TRM Extra: Small Group Activities

23

Related MiniCase

25

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Strategic Management, 6e Teacher‘s Resource Manual

Teacher’s Resource Manual: Implementation Guide This Teacher‘s Resource Manual (TRM), supports delivery of your chosen curriculum and pedagogy.

This manual contains more than just guidance on how to cover concepts discussed in the sixth edition of Strategic Management; it also provides tips and best practices for how to utilize the full product suite (from the textbook to SmartBook® to Connect®). In addition, this manual includes a variety of supplemental teaching resources to enhance your ability to create an engaging learning experience for your students. Regardless of whether you teach in face-to-face traditional classrooms, blended (flipped) classrooms, online environments, or hybrid formats, you‘ll find everything you need in this improved resource.

The TRM follows the order of the textbook outline for each chapter and is divided into sections for each learning objective. Each section identifies the relevant PowerPoint slides from both the Lecture slides and the Supplemental Lecture slides (more on this below). This eases your preparation time for class as you can adjust slides as needed to ensure your students stay actively engaged throughout each session.

WHAT INSTRUCTOR RESOURCES ARE AVAILABLE? Within each section of the TRM you will find an assortment of examples, exercises, Connect® assignments, updates on the latest research, Strategy Smart Video discussions, and discussion questions and exercises from which you can choose to enhance your students‘ learning and engagement.

Within the Connect® Library, you will find the following: In the Test Builder tab, you can create tests from the Test Bank that can be printed or administered within your LMS. In the Instructor Resources, you can access all of the following items:         

Teacher‘s Resource Manual PowerPoints (Accessible) Application-Based Activities‘ accompanying Teaching Notes Create™ Case Support MiniCase Support Sample Syllabi Video Library Capsim‘s Capstone Simulation and Capsim IM Image Bank (for your customized PowerPoints)

15) This Teacher‘s Resource Manual is posted by chapter.

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Strategic Management, 6e Teacher‘s Resource Manual 16) Two sets of ADA-accessible PowerPoints are available with each chapter: a. Lecture slides cover chapter concepts and exhibits. b. Supplemental Lecture slides cover: i. ii. iii. iv.

Chapter Cases Strategy Highlights Implications for Strategic Leaders Strategy Smart Video selections (not part of the book, but an additional resource found here) v. Key Terms

17) Test Bank questions, found in the Library tab entitled Test Builder, are posted by chapter. You will find a variety of question types within the test bank such as Matching, Ranking, Multiple Choice, Select-All-That-Apply, True/False, Short Answer, and Essays to test student mastery across Bloom‘s Taxonomy (i.e. Understand, Apply, and Analyze).

18) Create™ Case Support (all cases are available in Create™ and selected ones in HBP) a. A case matrix that identifies the industry sector covered by each case, as well as the primary and secondary chapter alignments b. One-page case abstract for quick overview of each case c. Case Teaching Notes for instructor use only d. Case Financials in Excel files for the exhibit data in the most popular cases e. Case Strategic Financial Analysis template f. Instructions on How to Download SEC Financial Data into Excel Spreadsheets 19) MiniCase Support (all MiniCases are located in Part Four of the book) a. MiniCase Teaching Notes comprising suggested answers to the MiniCase discussion questions. In some instances, they also provide specific additional article and video resources to accompany each MiniCase.

20) Video Resources, located in the Video Library, provide links to supplemental video resources to accompany both the MiniCases and full-length Create™ cases, as well as links to all of the assignable videos in Connect®.

21) A link to Capsim’s Capstone Simulation and a Capsim Instructor’s Manual correlated to Strategic Management is provided; this simulation allows students to apply their knowledge of key strategy concepts.

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Strategic Management, 6e Teacher‘s Resource Manual

HOW CAN SMARTBOOK® ENHANCE MY STUDENTS’ PERFORMANCE? SmartBook® is assignable through Connect®, McGraw Hill‘s online assignment and assessment system.

One of the first fully adaptive and individualized study tools designed for students, it creates a personalized learning experience, giving students the opportunity to practice and challenge their understanding of core strategy concepts. The reporting tools within SmartBook® show where students are struggling to understand specific concepts.

Typically, SmartBook® is assigned by module (chapter), and instructors can set which learning objectives to cover as well as the number of probes the student will see for each assignment. Instructors also set the number of points a SmartBook® module is worth in the course. Usually, applying a minimal number of points for completion of each module is enough to encourage students to read the chapter.

Many instructors assign these modules to be completed before the class or online session.

SmartBook® provides several diagnostic tools for instructors to gauge which concepts their students struggle to understand. Below is the set of adaptive assignment reports available in SmartBook®:      

Progress Overview: View student progress broken down by module.

Student Details: View student progress details plus completion level breakdown for each module.

Module Details: View information on how your class performed on each section of their assigned modules.

Practice Quiz: This gives you a quick overview of your students‘ quizzes results.

Missed Questions Metacognitive Skills

By selecting ―Module Details‖ the instructor finds the results for the students in the class overall. These details reveal where in the chapters students might be struggling. The module gives the chapter section, average time spent, average questions per student correct/total, and the percentage of correctness (number of assigned items). Information about the most challenging sections for students can help instructors refine the focus of the next classroom or online session.

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Strategic Management, 6e Teacher‘s Resource Manual For more detailed analysis, SmartBook® captures students‘ confidence in their competency using the ―Metacognitive Skills‖ report. Below (a recreation of the Metacognitive Skills report), we find the second student is confident and mostly correct (91% in the correct & aware column) while the first student ―doesn‘t know what they don‘t know‖ (39% in the far-right column).

STUDENT

Student 1 Student 2 Student 3 Student 4 Student 5 Student 6 Student 7 Student 8 Student 9 Student 10

CORRECT and AWARE 61% 91% 81% 83% 76% 66% 77% 91% 93% 70%

CORRECT and UNAWARE 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

INCORRECT INCORRECT and AWARE and UNAWARE 0% 39% 3% 5% 0% 19% 0% 17% 3% 21% 9% 25% 3% 20% 2% 7% 2% 5% 6% 25%

APPLICATION EXERCISES, QUIZZES, AND TEST BANK What resources are available at the book level?

Connect® offers a wealth of content for both students and instructors. Application Exercises require students to apply key concepts to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor. Before getting into chapter-level assignments, let‘s look at the book-level assignments available.

Four exercises are available for instructors to assign beyond the chapter materials. These are 1) MiniCase Case Analyses, 2) Case Exercises, 3) Financial Ratio Reviews, and 4) MyStrategy exercises.

The Financial Ratio Reviews and MyStrategy exercises comprise our new Student Primer in Connect.

9) To encourage analytical thinking, each MiniCase from Part Four of the book is also an assignable application exercise (MiniCase Case Analysis). Each MiniCase is followed by four to five multiple-choice questions that assess students‘ understanding of the key issues presented in the MiniCase.

10) Case Exercises focus on the key symptoms and influences of a problem a firm might be facing, followed by a series of questions that help students understand how the firm eventually achieves a solution to that problem (or asks students to suggest a solution).

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Strategic Management, 6e Teacher‘s Resource Manual 11) Financial Ratio Reviews give students the opportunity to further hone their financial analysis skills; review exercises cover each type of financial ratio (activity, leverage, liquidity, market and profitability).

12) MyStrategy exercises for each chapter provide direct personal applications of strategy concepts to careers and lives to help students internalize the content.

What resources are available for each chapter and how should I integrate them in my course?

Consider assigning one or two Application Exercises per chapter. They are built around chapter learning objectives, so the instructor can choose based on their focus for each specific chapter. Several types of application exercises are available in each chapter. The newest additions are our Animated Videos, comprising three- to four-minute videos on key concepts or concepts that tend to challenge students the most. Each animation is accompanied by three to four multiple-choice questions to check student attention and comprehension. Comprehensive Case Analyses and our new On-Location Video Cases feature firms and industries different than those discussed in the textbook and provide relevant, topical information for students. Finally, Click-and-Drag exercises help students actively demonstrate their understanding of the associated learning objectives. Application Exercises can be assigned as preparatory exercises due before class (this is especially good for flipped classrooms), or after class as concept comprehension checks. Applications Exercises will generally be assigned as homework or practice as part of the overall class grade. A general rule of thumb would be to make application exercises worth 5 to 10 points each since these require time and thought.

To find the Applications in Connect®, go to ―Add Assignment‖ and then select ―Question Bank.‖ Application Exercises are organized by chapter. Instructors have the option to select for one attempt only, but they may want to give students unlimited or multiple attempts on the first few assignments to give students a chance to learn and navigate the system. (As the course progresses, instructors may want to tighten up the time on task and reduce the number of attempts to complete each exercise).

Chapter quizzes and full chapter test banks are available for assignment, and like the Application Exercises, are organized by chapter. The value applied to each question should be relatively low because numerous questions are usually assigned for each chapter. As such, make these questions worth 1 or 2 points each. The feedback given to students is time-flexible. Selecting feedback to be displayed after the assignment due date helps to keep students from giving the correct answers to other students while the questions are still available. For this reason, it is suggested that no feedback to quizzes and test bank exams be made available until after the assignment is due.

When should I assign these digital components?

To fully utilize the power of the digital components, instructors will often assign the SmartBook® reading and adaptive learning probes before class meets. Application Exercises can be completed either before or after class; if they are completed before class, they can sometimes serve as good springboards for class discussions. The chapter quiz makes a good check on comprehension of the material and may work best if assigned after each class period. The test bank serves as a good resource for building midterm or final exams.

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Strategic Management, 6e Teacher‘s Resource Manual More detailed information on SmartBook® and Connect® is available through several resources at McGraw Hill. A good starting point is your local Learning Technology Representative, who can be found here: http://www.mheducation.com/highered/platforms/connect/features-educators.html

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Strategic Management, 6e Teacher‘s Resource Manual

COURSE PREPARATION Helpful Suggestions Regarding Assignment Policies: Connect® gives instructors a wide array of flexibility in making assignments and creating grading policies. Instructors may choose to: 

assign as many assignments as appropriate given the level and time commitment expected for the class,



determine point values for each question/application that works within the total course percentages,



make available multiple attempts per assignment with options of accepting the highest score or averaging all the attempts together (several attempts are particularly good for homework assignments),



deduct points for late assignment submissions (percentage deduction per hour/day/week/etc.) or create hard deadlines thus accepting no late submissions,



show feedback on application/questions immediately upon submission or at the time the assignment is due for the whole class, create new assignments or questions from scratch, or edited versions from a variety of provided resources.

Throughout the TRM for each chapter, we will integrate materials from the Lecture PowerPoint slides, Supplemental Lecture slides, Connect® Application Exercises, and MiniCases. This integration of resources will allow for a cohesive presentation of the relevant resources at your disposal, helping you to convey these topics effectively and efficiently to your students.

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Strategic Management, 6e Teacher‘s Resource Manual

CHAPTER 3 Learning Objectives LO 3-1 Generate a PESTEL analysis to evaluate the impact of external factors on the firm.

LO 3-2 Differentiate between firm effects and industry effects in determining firm performance.

LO 3-3 Apply Porter‘s five competitive forces to explain the profit potential of different industries.

LO 3-4 Examine how competitive industry structure shapes rivalry among competitors.

LO 3-5 Describe the strategic role of complements in creating positive-sum co-opetition.

LO 3-6 Explain the five choices required for market entry.

LO 3-7 Appraise the role of industry dynamics and industry convergence in shaping the firm‘s external environment.

LO 3-8 Generate a strategic group model to reveal performance differences between clusters of firms in the same industry.

In this chapter, we turn our attention to the firm‘s external environment: the industry in which the firm operates, and the competitive forces that surround the firm from the outside. The chapter starts with a look at macro level influences including political, economic, sociocultural, technological, ecological, and legal.

Next, the structure of an industry is analyzed. Industry structure captures important economic characteristics such as the number and size of competitors, whether the offering is an undifferentiated commodity like steel or a highly differentiated service like management consulting, and the height of entry and exit barriers. We look at the dynamics of industry change over time including entry choices a firm may make. Finally, we discuss how strategic group mapping can be used to explain performance differences within the same industry.

A chapter opening case on Airbnb and two strategy highlights are included in the chapter for tangible applications of the theoretical frameworks discussed.

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Strategic Management, 6e Teacher‘s Resource Manual

Text Chapter Contents ChapterCase 3: Airbnb‘s Pandemic Pivot 3.1 The PESTEL Framework (LO 3-1) CONNECT® INTEGRATION Case Analysis: PESTEL Forces Strategy Highlight 3.1: Blockbuster’s Bust 3.2 Industry Structure and Firm Strategy: The Five Forces Model (LO 3-2, LO 3-3, LO 3-4, LO 3-5) CONNECT® INTEGRATION Multiple Choice: Industry Structure and Firm Strategy 3.3 Changes over Time: Entry Choices and Industry Dynamics (LO 3-6, LO 3-7) CONNECT® INTEGRATION Multiple Choice: Entry Choices and Industry Dynamics Strategy Highlight 3.2: From League of Legends to Fortnite: The Rise of e-Sports 3.4 Performance Differences within the Same Industry: Strategic Groups (LO 3-8) CONNECT® INTEGRATION Case Analysis: Strategic Groups: Pharmaceuticals 3.5 Implications for Strategic Leaders ChapterCase 3 / Part II CONNECT® INTEGRATION Comprehension Case: Airbnb’s Pandemic Pivot

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Strategic Management, 6e Teacher‘s Resource Manual

Chapter Teaching Resources SECTION

Title

RESOURCE TYPE

CHAPTERCASE 3

Airbnb‘s Pandemic Pivot ―What Is Airbnb?‖

Web Video (1 min)

PESTEL Forces

Connect® Case Analysis

Ethical/Social Issues: EVs in Europe

TRM Extra

Ethical/Social Issues: VW emissions

TRM Extra

MiniCase 3: Robinhood: Democratizing Investing or Robbing Investors?

Rothaermel Textbook

Industry Structure and Firm Strategy

Connect® Multiple Choice

The Five Competitive Forces That Shape Strategy

Harvard Web Video

Small Group Exercise: Textbooks

TRM Extra

Citigroup Eyes Payments-Sector Consolidation

WSJ Article

Justice Department Preparing Legal Action Against Live Nation

WSJ Article

Entry Choices and Industry Dynamics

Connect® Multiple Choice

Strategic Groups: Pharmaceuticals

Connect® Case Analysis

Airbnb‘s Pandemic Pivot

Connect® Comprehension Case

3.1: The PESTEL Framework

3.2: Industry Structure and Firm Strategy: The Five Forces Model

3.3: Changes over Time: Entry Choices and Industry Dynamics

3.4: Performance Differences within the Same Industry: Strategic Groups

3.5: Implications for Strategic Leaders

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Strategic Management, 6e Teacher‘s Resource Manual China Halts Shipments of Rare Earth The collapse of American rare earth mining

NYT Video (6 mins) Reagan Defense Article

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Strategic Management, 6e Teacher‘s Resource Manual

Overview of the Chapter 3.1

The PESTEL Framework The external environment of the firm has a large impact on its competitive advantage. Exhibit 3.1 shows a number of elements of the general and task environments a firm faces. The chapter outlines several factors largely beyond the control of the firm. In Strategy Highlight 3.1, the fate of Blockbuster is discussed as the firm failed to respond to technological changes that competitors such as Netflix were exploiting.

3.2

Industry Structure and Firm Strategy: The Five Forces Model The chapter moves into industry analysis here and the emphasizes the widely used five forces model to study a firm‘s strategic position within an industry. Exhibit 3.3 shows the model and a description of each of the forces follows. A key point made is to understand what factors influence the strength of the forces. It is the workings of these factors that drives the potential profits higher or lower in a given industry. Exhibit 3.5 summarizes many of these factors.

Competitive industry structure is also discussed as an important aspect of industries as firms make decisions on joining or abandoning various lines of business. The U.S. airline industry is used as an exemplar industry to help the students with a more tangible example of many of the five forces factors. Finally complements and co-opetition are discussed as contributing aspects to the five forces model in more recent times.

3.3

Changes over Time: Entry Choices and Industry Dynamics The consideration of possible entry into a new market is shown in Exhibit 3.6. The figure and accompanying text walk through a number of questions and strategies for successful entry.

Industries are not stagnant, and the concept of industry convergence is discussed with several examples of technological changes. The Strategy Highlight 3.2 covers the changing industry of e-sports through games such as League of Legends and Fortnite.

3.4

Performance Differences within the Same Industry: Strategic Groups Firms within the same industry operates in a strategic group of similar strategies. An example of a strategic group model which is a clustering analysis tool, is presented in Exhibit 3.8. The strategic map shows a mobility barrier which limits the movement of firms between different strategic groups.

3.5

Implications for Strategic Leaders Organizational leaders can use the tools in this chapter to scan and evaluate macroenvironmental factors and then move to more task environment factors with external industry forces and finally evaluate different firms within the same industry via strategic grouping.

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Strategic Management, 6e Teacher‘s Resource Manual

Classroom Outline ChapterCase 3 Airbnb’s Pandemic Pivot The opening ChapterCase discusses the growth of Airbnb from its founding in 2008 to having over 5 million listings in 190 countries. The founders originally started with providing places to sleep during big major events (SXSW and the 2008 Democratic National Convention). However, the company did not have a sustainable business model until it obtained help through a Silicon Valley incubator. That experience prepared Airbnb to successfully enter the global hotel industry with its disruptive business model. In 2019 Airbnb was valued at $31 billion dollars even though still a private firm. The COVID-19 came close to derailing their success. Given Airbnb‘s resilience and agility, the company quickly noted changing travel trends—guests booked trips closer to home (and out of large metropolitan areas), and preferences for rentals shifted. In 2022, Airbnb‘s success is evident with their $114 billion valuation, double that of long-time market leader Marriott.

INSTRUCTOR SUPPLEMENT SLIDE 3

STRATEGY SMART VIDEO EXAMPLE INSTRUCTOR SUPPLEMENT SLIDE 13 A one-minute commercial, ―What Is Airbnb?‖ is on YouTube.

INSTRUCTOR SUPPLEMENT SLIDE 14 Available on YouTube is an ABC News story on the dark side of opening your home to strangers on Airbnb: ―Airbnb Home Rental Nightmares.‖

ChapterCase 3 Part II The closing ChapterCase provides more information on the stiff regulatory environment building against Airbnb in several major cities across the globe. Despite continuing to operate and grow, Airbnb did not remain untouched by the pandemic (e.g., layoffs, delayed IPO, etc.). While owners benefit from these short-term rentals in their units, the other residents are often faced with tourists and parties in their own buildings. Residents and major hotel chains have joined together in some urban areas and encouraged passage of restrictions on short-term rentals.

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Strategic Management, 6e Teacher‘s Resource Manual

ChapterCase 3 Discussion Questions 4. Why do PESTEL factors have such a substantial impact on the future of a business?

Identify key PESTEL factors for Airbnb, and explain why they can have a significant impact (positive or negative) on the firm‘s business.

It may be helpful to discuss each factor – students will be able to see that not all PESTEL factors impact the hospitality industry the same as other industries. PESTEL factors that likely impact Airbnb‘s industry include political and legal (see sub-question A), economic (how expensive it is to travel), and sociocultural trends.

A. What activities might Airbnb include in a nonmarket strategy to respond to and shape its regulatory environment?

As highlighted in the ChapterCase Part II, regulatory factors are particularly salient for Airbnb.

Lobbying will likely be the easiest response to give, but encourage students to think about other ways that Airbnb can change the environment in which it does business. Sociocultural factors warrant extra attention—as short-term rentals becomes more popular and people become more familiar with the concept, it becomes more widely accepted.

B. How can awareness of PESTEL factors guide the internal actions that a firm decides to undertake? How might strategic leaders learn from Airbnb‘s example?

Understanding the external environment helps firms understand how their strategies and decisions are impacted by forces out of their direct control. Airbnb‘s challenges in gaining both regulatory/political approval plus their work to gain acceptance by mainstream travelers are important to understanding Airbnb‘s success. Additionally, the leadership at Airbnb spent time understanding the trends and changing environment, allowing them to pivot and successfully adapt.

5. How could an internet startup disrupt the hospitality industry long dominated by Marriott and Hilton, which took decades to become successful worldwide hospitality chains? Explain using the Entry Choices framework (see Section 3.3).

The results that Airbnb has achieved in only one decade are amazing. There are several advantages its model has over the traditional hotel industry. Airbnb is providing a service to match supply of privately owned rooms to the demand of travelers to an area. The firm does not OWN the spaces and therefore did not require the intensive amount of capital and time needed for actually building a hotel. Further because Airbnb doesn‘t own the real estate, it is not incurring a major cost if the rooms go unrented for a period of time. With low initial costs, its growth rate is dependent on getting a supply of spaces to rent. As noted in the chapter, the financial crisis timing was actually a big benefit to Airbnb. If the global economy continues to improve, will large numbers of hosts decide they don‘t really want strangers using their property and exit the system? Only time will tell.

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Strategic Management, 6e Teacher‘s Resource Manual 6. Evaluate the actions that Airbnb took in response to the global pandemic. Would you have recommended other activities? If so, which specific activities would you have recommended? If not, why not?

Students will likely have varying responses to this question. While some students may see the success of Airbnb‘s pivot, others may condemn or be critical of a company pushing for travel during a pandemic.

Other students may focus on Airbnb horror stories or be critical of a tech company.

3.1 THE PESTEL FRAMEWORK LO 3-1 Generate a PESTEL analysis to evaluate the impact of external factors on the firm.

LECTURE SLIDES 3–11 EXAMPLES You might want to open this section with an illustration of peeling back layers of an onion to show students the strategic analysis process of beginning in the broad macroenvironment, closing in on the industry environment, and then finally reaching the firm environment. Students often need clarification to understand that the PESTEL factors are traits of the environment that impact multiple industries— some more than others. We find that they often have trouble distinguishing industry structure issues from macroenvironment issues. If sports analogies are popular in your class, then you might consider an example of your nearest MLB team. Ask students to identify factors that affect the team‘s profit and then sort those into factors that are related only to the MLB industry from those that are common to all pro sports, all sports, sports television/radio, sports advertising and sponsorship, disposable income for entertainment, and spectator entertainment in general (concerts, county fairs, anything else a consumer might buy a ticket to attend, etc.)

INTEGRATION Case Analysis: PESTEL Forces This case analysis gives the students an opportunity to analyze external forces on Tesla Motors and the U.S. car industry using the PESTEL framework. The application exercise has a case with information about Tesla and then has four questions following it. The student will need to read both the case and the textbook-related materials on PESTEL before answering the questions in the activity. 

Difficulty: Medium  Blooms: Apply

Follow-Up Activity: The instructor can expand on the concepts of external analysis in several ways.

One suggestion is to have the whole class choose an industry generally well known (casual dining restaurants, mobile phone providers, footwear retailing, etc.) and assign one category of the PESTEL 8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual framework to each small group. If more time is available, each small group could take a different commonly known industry and analyze which PESTEL factors would be the most important for that group of businesses. If the instructor/class is interested in electric cars, there is a very good full case about Tesla associated with the Rothaermel textbook.

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for information on for information on an extended discussion about the governmental approaches for electric vehicles in several European countries.

CLASS EXERCISES PESTEL is an easy topic for a quick small group activity. We select an industry the students are familiar with (retailing, fast food, computers, and so on) and then assign each group one of the six PESTEL forces to think about relative to that industry. This way, each group has something a bit different to discuss when the whole class is pulled back together.

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for information on for information on an extended discussion about the ethical issues of Volkswagen and U.S. and global regulatory issues around falsifying emissions testing.

PESTEL Analysis Overview: This video can substitute for your lecture in an online class or be viewed by students as preparation before your lecture. It is assignable inside Connect®.

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity around a discussion that pushes beyond analysis to include the formulation and implementation stages of the strategic management framework. Instead of accumulating an array of data from a PESTEL analysis as a list of macro-environment factors that impact the industry environment, this exercise allows you to focus on one PESTEL factor, sociocultural for the packaged food industry to develop one threat, ―societal concern for healthy eating, particularly for children, is reducing product demand.‖ Then you move to the next step to discuss what a particular firm in that industry should do in defending itself against that industry threat, in other words, you 9 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual formulate a strategy. Then you move to the final step of developing an implementation plan for that strategy.

Strategy Highlight 3.1 Blockbuster’s Bust Click here for a summary of the Strategy Highlight covering the fall of Blockbuster in lieu of technology changes in the video rental (and streaming) market.

INSTRUCTOR SUPPLEMENT SLIDE 5: BLOCKBUSTER’S BUST Additionally, MiniCase 3: Robinhood: Democratizing Investing or Robbing Investors? is a good fit for topics covered in this section of the text. This case discusses trading industry disruptor Robinhood, the company that combined technological innovation with business model innovation. MiniCase 3 includes three discussion questions in the textbook. Every MiniCase has assignable McGraw Hill Connect® case questions available.

3.2 INDUSTRY STRUCTURE AND FIRM STRATEGY: THE FIVE FORCES MODEL LO 3-2 Differentiate between firm effects and industry effects in determining firm performance.

LECTURE SLIDES 12–28 In this section, we discover that firm effects are much larger than industry effects on firm performance.

This means that managerial action and strategic leadership are important in determining the overall firm‘s performance. This is also important for the purpose of this strategic management course. If industry was the dominant determinant of performance the role of strategy would be much smaller as the main decisions would be completed when the industry to enter was determined.

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Strategic Management, 6e Teacher‘s Resource Manual LO 3-3 Apply Porter‘s five competitive forces to explain the profit potential of different industries.

The five forces model shows how the creation of economic value is not enough for competitive advantage. Firms must also capture a good share of the value they create. Otherwise, they can see the profits move to suppliers, customers, or competitors. The five forces also more generally provide a picture of the industry‘s profit potential. Typically, the stronger the forces the lower the profit potential and therefore the less attractive it would be for competitors.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 15 ―The Five Competitive Forces That Shape Strategy‖: This is a 13-minute video interview with Michael Porter. He uses the airline versus soft drinks industries as examples of applying the five forces model.

The five forces model is one of the most widely used tools in strategy. It is worth spending some time on it. Michael Porter wrote his original work on the subject over 30 years ago. However, he updated this work in 2008 and you may want to review his article in HBR for more details on the model. (Porter, M. E. (2008), ―The five competitive forces that shape strategy.‖) Year after year we find that students at all levels have a difficult time grasping the five forces model at a level of understanding, much less analysis and evaluation. It will not be possible to over-teach or over-repeat this topic. I recommend that students read the textbook Section 3.2, then watch the video, then review the textbook section again, then attend/watch my lecture on the five forces. They might think it is overkill at the time, but I warn them that correct use and understanding of this model is fundamental to success for the rest of the course.

EXAMPLES While the primary purpose of the five forces model is to assess the profitability of an industry, you will find that many students are confused into thinking that its purpose is to determine whether or not to enter an industry. As a result of this misconception, they can get a bit tangled between the overall assessment to identify how profitable it would be for a new firm to enter an industry and the barriers to new entry.

The soft drink industry offers a good example to clear up this misunderstanding. The industry is quite attractive, however the barriers to entry in the soft drink industry are such that it would be quite difficult to compete with Coca-Cola and Pepsi on a national or even regional level. Newer firms are tending to enter in niche spaces such as the super-caffeinated energy drinks to avoid direct competition with a powerhouse like Pepsi. This discussion also lays the groundwork for corporate strategy by identifying that in industries with high barriers to entry, acquisition or alliances can be preferred entry modes over greenfield investment.

Soft drinks have been one of the most profitable industries for decades, with an average ROIC of 37.6 percent between 1992 and 2006. Michael Porter calls soft drinks a ―five star‖ industry; by that, he means that each of the five forces is weak, leading to superior industry performance. The nature of competition between Pepsi and Coke is benign for the most part, focusing on non-price factors such as lifestyle advertising and product innovation rather than on price. The barriers to entry are high, because of the strong brand equity enjoyed by Coke and Pepsi, which has been built up over many decades. In addition, bottling is a capital-intensive activity. Consumers tend to be loyal to ―their‖ cola, identifying themselves as Coke or Pepsi drinkers. The power of suppliers is quite limited: Arguably the most valuable input 11 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual (e.g., Coke‘s secret formula) is provided by the soft drink companies, while the other inputs are commodities (e.g., water, aluminum cans, plastic bottles, and others). Likewise, the power of buyers is weak, because intermediate customers like bottling franchises and distributors are locked into long-term exclusive contracts with the soft drink companies, and the final end consumer market is extremely fragmented. Not even Walmart is able to force significant price discounts from Coca-Cola or Pepsi, focusing instead on offering its private-label cola Sam‘s Choice. Favorable competitive forces indicate a significant profit potential in the soft drink industry that the dominant players Coke and Pepsi are well positioned to capture. It should become apparent if you were going to invest some money buying stock in a firm over the long term that a strong firm in the soft drink industry is likely to win out over such a firm in the airline industry.

DISCUSSION TOPICS To illustrate the supplier and buyer impacts on industry attractiveness you can use a tug-of-war exercise.

One rope connects the suppliers to the industry rivals. Another rope connects the buyers to the industry rivals. A knot in the center of the buyer rope illustrates the industry sales price and a knot in the supplier rope illustrates the industry COGS paid to suppliers. The supplier rope will be manned by supplier sales reps on one side and industry rival purchasing agents on the other. Similarly, the buyer rope will be manned by the buyer purchasing agents and the industry sales reps. Have the industry sales reps and purchasing agents stand on opposite sides of the room and the suppliers and buyers in the center. Draw a line with masking tape in the center to represent a zero margin for the industry. Draw a line on the industry purchasing agent side to represent the suppliers COGS (zero margin for suppliers) and a line on the sales rep side to represent the buyer‘s value for the product (zero benefit for the buyers). Start with the knots centered between their respective lines. The closer the two knots get to the center the smaller the industry margin becomes. Choose the stronger students to represent supplier, buyer, and industry power with greater negotiating power and switch the power to show the difference between soft drinks and airlines.

Substitutes: Use some of these examples to discuss the concepts of closeness of substitutes and price/performance trade-offs: video conferencing versus business travel; e-mail versus express mail; plastic versus aluminum containers; gasoline versus biofuel; landline telephone services versus Voice over Internet Protocol (VoIP, offered by Skype or Vonage), milk versus soft drinks, beer, and wine, or Internet streaming versus cable television or music purchases.

New Entrants: In the aircraft manufacturing industry, at least for large commercial jets, Boeing and Airbus are the only competitors. There is not a significant threat of entry because entering the airframe manufacturing industry requires huge capital investments. In fact, Airbus was only able to overcome these tremendous barriers to entry with the help of direct subsidies from several European governments including France, Germany, Spain, and the UK. New Entrants: Patents and trade secrets, such as the original Coke formula, are examples of proprietary technology and know-how that can also reduce the threat of entry. The value of trade secrets to a firm is reflected in the efforts to improve cyber-security so that trade secrets cannot be stolen by hacking into corporate computers.

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Strategic Management, 6e Teacher‘s Resource Manual Buyer Power: Buyers are also powerful when they can credibly threaten backward integration.

Backward integration occurs when a buyer moves upstream in the industry value chain, into the seller‘s business. This situation is also observed in the auto-component supply industry, in which car manufacturers such as GM, Toyota, or Volkswagen have the capability to backward-integrate in order to produce their components in-house if their demands for lower prices and higher product quality are not met by their suppliers. Taken together, powerful buyers have the ability to extract a significant amount of the value created in the industry, leaving little or nothing for producers.

CLASS EXERCISES You can illustrate the impacts of new entrants, substitutes, and complements with a pizza example. Form four groups of students: new entrants, substitutes, complements, and focal industry rivals. Bring three pizzas (one smaller than the other two and one of the larger ones a different type than the other) to class.

Caution students not to eat pizza until teaching is done! Hand the smaller pizza to the industry rivals.

Explain the drivers of rivalry intensity and what consequences that has for how evenly and civilly the pie is shared among all of the hungry incumbents. Hand one of the larger pizzas to the complements industry; explain how as the complements industry grows the size of pie available to the focal industry rivals grows. Ask someone in the complements industry to swap out the focal industry‘s small pie for the bigger one. Hand one pizza to the substitutes industry and explain how they are a separate industry that has its own profits, but in this case they are close substitutes for the focal industry. The substitute industry begins to take customers/profit from the focal industry. Ask someone from the substitutes industry to take a piece of pizza from the focal industry. Explain that new entrants are firms who are not in the focal industry but decide to enter it. Send a student from the new entrant‘s team over to the focal industry team and tell them to take a piece of pizza. Discuss the impact of the lost pieces of the focal industry pie on the original incumbents. Then let the students eat your teaching materials!

Frankly, if you have been teaching a few years, you are probably pretty tired of doing five forces analyses on soft drinks, airlines, and pharmaceuticals. Take a break from routine and try the online dating industry this semester. You can assign the students ―The Dating Business: Love on the Rocks,‖ (The Wall Street Journal, June 11, 2015) to provide background on the industry.

LO 3-4 Examine how competitive industry structure shapes rivalry among competitors.

This learning objective covers more specifically the rivalry of competitors. We find the industry structure itself is an important contributor to the competitive environment in which the firm competes.

EXAMPLES The competitive industry structure has the benefit of simplicity compared with the five forces model, BUT it is also a bit harder for students to grasp as it is a continuum and may not always yield ―black & white‖ answers. One such example: Although undifferentiated agricultural products are commodities leading to a perfect competitive market structure, farmers have noted the demographic trend toward organic food. The demand for organic milk far outstrips supply and allows dairy companies to command a 50–100 percent price premium over non-organic milk. The dairy producers now enjoy some pricing power as a result of their differentiated product.

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Strategic Management, 6e Teacher‘s Resource Manual An example of a U.S. oligopoly might be the accounting firm industry. In contrast, the U.S. personal injury attorney industry is much more fragmented, and rivalry is more intense. You can expand this contrasting example by asking students how competition within each industry to hire the best accounting graduates or the best law school graduates differs due to industry structure.

While natural monopolies appear to be disappearing from the competitive landscape, so-called near monopolies are of much greater interest to strategists. These near monopolies are firms that have accomplished product differentiation to such a degree that they are in a class by themselves, just like a monopolist. Intel, with its 80 percent market share in semiconductors, is a near monopoly. Discuss the impacts on both the semiconductor industry and the industry of its largest buyers, such as PC manufacturers.

The European Union, for example, views Intel (with its 80 percent market share in semiconductors) as a near monopoly. This is an enviable position in terms of the ability to extract profits, so long as Intel can steer clear of monopolistic behavior, which may attract antitrust regulators and lead to legal repercussions.

LO 3-5 Describe the strategic role of complements in creating positive-sum co-opetition.

The role of complements can further enhance the effectiveness of the five forces model. The rise of digital technologies has created a greater role for complements in a wide array of industries.

EXAMPLES A good example of what a complement is would be the Halo game franchise and the effect it has had on driving increased sales in the video game console industry, in this case helping Microsoft Xbox at the expense of its rivals, but still increasing the total industry sales. You also need an example of what complements are NOT. Students often think that if products ―go together‖ then they must be complements—not so. Gasoline is not a complement to the car industry. When you purchase a gallon of gasoline it does not make you want to go out and buy an extra car or even a replacement car to go with it.

Strategy is not a zero-sum game; many strategic successes are accomplished when firms cooperate with one another. The goal is to create a larger pie rather than to fight in cutthroat competition over a fixed market. Even direct competitors cooperate occasionally, to create win–win scenarios. As an illustration of co-opetition, the new Cell microprocessor, which powers the PlayStation game console, was the result of a collaborative effort among IBM, Toshiba, and Sony—companies that directly compete with one another. The creation of Hulu to compete with Netflix is also a great example of co-opetition.

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE

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Strategic Management, 6e Teacher‘s Resource Manual Click here for a suggested small group activity on using the five forces plus complements model to think through the various impacts such technology shifts may have on the college textbook industry.

INTEGRATION Multiple Choice: Industry Structure and Firm Strategy This exercise will demonstrate student‘s ability to differentiate between the critical influencers of an organization‘s success and to understand how competitive industry structures shape rivalry among competitors.  

Difficulty: Medium Blooms: Apply

3.3 CHANGES OVER TIME: ENTRY CHOICES AND INDUSTRY DYNAMICS LO 3-6 Explain the five choices required for market entry.

LECTURE SLIDES 29–31 Since the five forces model helps to identify more favorable industries, it is appropriate for us to look at the strategic process firms can use to make decisions on entering a market. Exhibit 3.6 shows an integrative model with five different questions related to a firm‘s choice to enter a new market. Some questions build naturally from the five forces (i.e. who are the players?). Others go beyond the five forces to address for example how to enter the market. The model also brings in a time dependent component which the static five forces lacks. This leads us to a further discussion of changes in industries over time in the next section.

LO 3-7 Appraise the role of industry dynamics and industry convergence in shaping the firm‘s external environment.

DISCUSSION TOPICS The U.S. banking industry has experienced major consolidation, and banking giants like Citigroup, Bank of America, and Wells Fargo have emerged. In a similar fashion, there used to be the Big Eight in the accounting and professional services industry, handling the audits of publicly traded and well-to-do private companies. Today, only the Big Four remain: PricewaterhouseCoopers (PWC), Deloitte, Ernst & Young (EY), and KPMG. You could invite the finance and accounting majors in your class to lead the discussion of what changes in the industry caused this consolidation to occur. The banking industry is starting to move into investment advising and payments processing is also an area they are exploring for 15 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual growth in times of record low interest rates. (see ―Citigroup Eyes Payments-Sector Consolidation with Investment Banking Hire,‖ The Wall Street Journal).

Industry consolidation can lead to anti-competitive behavior and increased government scrutiny for proposed mergers. One of many such examples is the 2019 investigation into the prior merger of Ticketmaster and Live Nation. The terms of the approved merger in 2010 stipulated competition must be preserved in music and ticketing industries. With soaring ticket prices (over 50% increase from 2009 to 2019), the U.S. Justice department is investigating changes to the merger agreement per this WSJ article, ―Justice Department Preparing Legal Action Against Live Nation for Ticketing Practices.‖ Use this funny video from ―The Onion‖ satirical website, ―How Will the End of Print Journalism Affect Old Loons Who Hoard Newspapers?‖ to discuss how rapid evolution in one industry can create change in other industries. Ask students first to identify the macroenvironment forces that are contributing to the decline of the newspaper industry. Then ask them to identify (a) other industries that will be affected either positively or negatively by the decline of the print newspaper industry and (b) other industries affected either positively or negatively by the same macroenvironment forces that are hurting the newspaper industry

Strategy Highlight 3.2 From League of Legends to Fortnite: The Rise of Esports Click here for a summary of the Strategy Highlight covering the Esport industry and how even a relatively new industry is moving from one dominant player to the next.

INSTRUCTOR SUPPLEMENT SLIDE 6: FROM LEAGUE OF LEGENDS TO FORTNITE: THE RISE OF E-SPORTS

3.4 PERFORMANCE DIFFERENCES WITHIN THE SAME INDUSTRY: STRATEGIC GROUPS LECTURE SLIDES 32–37 LO 3-8 Generate a strategic group model to reveal performance differences between clusters of firms in the same industry.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 16 We have found that the mapping of strategic groups is useful in helping students understand the competitive dynamics within industries. This can also be used as a small group activity in the classroom.

Display the airline example in Exhibit 3.8 and ask each group of students to select a different industry 16 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual and plot out some of the firms they may know in that industry (retailing of various types, restaurants, and consumer brands are often selected by our students).

For a more intense discussion you might want to go deeper into one industry and explore the importance of the dimensions for the strategic map. If so, choose the industry and then hold a large group discussion on the appropriate dimensions for mapping the industry. Then assign small groups to map the industry on the board or flip charts using different dimensions. Invite them to share their maps and draw strategic implications. Then hold a discussion about how the dimensions you choose might affect management cognition of competitive threats.

INTEGRATION Case Analysis: Strategic Groups: Pharmaceuticals This activity builds student comprehension using a case about the pharmaceutical industry. The student must read the case provided, as well as the relevant textbook section, and answer the five questions in this exercise. This case analysis gives the students an opportunity to consider the strategic group mapping framework in a less well-known industry than the airline example in the textbook.

Follow-Up Activity: The instructor can expand on the concepts from this case analysis by having students compare the differences in this case with the one on airlines in the textbook. In particular, the differences in X-axis values and the mobility barriers may yield good student discussions. 

Difficulty: Medium  Blooms: Apply

3.5 IMPLICATIONS FOR STRATEGIC LEADERS INSTRUCTOR SUPPLEMENT SLIDE 8 EXAMPLE It is useful to explain to students that they will be using these tools, especially the five forces model throughout their careers, not just as senior executives. Some examples include: preparing for an appointment with a key supplier or customer, estimating the duration of a first mover advantage, evaluating whether and how to compete on RFPs, predicting the reaction of competitors for estimating financial return on a new facility investment, or positioning the value your firm can contribute to potential partners.

The external analysis is used in corporate strategy to identify attractive industries or markets to enter and determine key success factors therein. It is used in business-level strategy to predict trends in rivalry and to choose a favorable positioning strategy. It can also be used to identify structural drivers of profitability that can be changed by firm strategy.

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Strategic Management, 6e Teacher‘s Resource Manual CLASS EXERCISE To develop critical reasoning and decision-making skills, you might try an exercise that takes the data from an external analysis, assesses implications for industry profitability, translates the results into the opportunities and threats for the industry, and then develops alternative offensive and defensive strategies to take advantage of opportunities and mitigate threats. Here is one such example: Suppliers of rare earth metals have strong negotiating power versus the firms in the electric car industry.

The reasoning to support this conclusion is that there are few suppliers, the focal industry has high switching costs, supplier products are critical to the focal industry‘s products, the focal industry purchases low volumes, and there is low rivalry in the supplier industry. The implications are that focal industry profitability will be reduced by a higher COGS. A New York Times video with some history on this issue and China‘s dominant position in it is ―China Halts Shipments of Rare Earth.‖ More recently the single rare-earth mine in the continental U.S. was sold…to a Chinese firm (see ―Mountain Pass Mine Approved for Sale to JHL, QVT, Shenghe,‖ The Wall Street Journal, or ―The collapse of American rare earth mining‖, Reagan Defense Forum).

Threat: High supplier power by rare earth industry, due to few suppliers, low profitability among them, [etc.], will depress profitability of the focal industry.

An offensive alternative strategy would be to backward integrate into the rare-earth mining industry. A defensive alternative strategy would be to develop alternative battery technologies that use different metals and design manufacturing plants to be flexible enough to produce multiple versions, thereby reducing switching costs.

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Strategy Highlights Strategy Highlight 3.1 Blockbuster’s Bust This strategy highlight sets the stage for two important streams of discussion. First, ask the class to think about Blockbuster‘s failure to evolve with the market in terms of strategic direction from its top leadership that they learned about in Chapter 2. Might a product-centered vision and mission back when Netflix was launched have constrained the firm from looking at the big picture from the consumer‘s perspective? Second, which PESTEL forces had the largest impact on the demise of Blockbuster? What could their management have done differently to have a more successful outcome for the firm?

Strategy Highlight 3.2 From League of Legends to Fortnite: The Rise of e-Sports This strategy highlight discusses the multiplayer online battle games industry. Launching only a decade ago Riot Games is the firm credited with the tremendous growth of e-sports as an industry. In 2011 a Chinese firm (Tencent) bought Riot Games for $400 million. Even though the games are free to download and free to play, the firms rely on in-game purchases and live or live-streamed e-sport events for sources of income. A new contender in this space Epic Games launched Fortnite in 2017. Due to its easier design and more universal device access (computers, mobile, game boxes), Fortnite seems to be taking market share and revenues in this new industry.

INTEGRATION Comprehension Case: ChapterCase—Airbnb‘s Pandemic Pivot Here, we provide both Parts 1 and 2 of this case, accompanied by short-answer questions that students can complete and submit. Due to the nature of these open-ended questions, they require manual grading. 

Difficulty: Medium  Blooms: Apply

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Strategic Management, 6e Teacher‘s Resource Manual

myStrategy INSTRUCTOR SUPPLEMENT SLIDE 10: SMALL GROUP EXERCISE #1 Here, we encourage the student to take what they have learned about competitive advantage and apply it to his/her own career. Encourage students to spend a few minutes looking at their ideas about future trends and how it may impact their career options.

1. Many job-seekers approach the job market by thinking about particular firms that they‘d like to work for. What are some advantages of broadening this thought process to consider the industry-level factors of a potential new employer?

Some of our students who are looking for the ―what to do after graduation‖ have found this exercise to be a useful way to think about what they are good at and what they would probably want to stay away from as far as a future career. An industry approach can help identify longer range trends and also lesser known firms that might be good candidates for employment.

2. What industries do you think may offer the best U.S. (or domestic) job opportunities in the future? Which industries do you think may offer the greatest job opportunities in the global market in the future? Use the PESTEL framework and the five forces model to think through a logical set of reasons that some fields will have higher job growth trends than others.

In the United States, and globally, among the top industries for job opportunities are health care, Internet services, and perhaps the energy fields (as discussed in Chapter 1). While some macro environmental forces are harder to predict (time and depth of recessions, and global tariffs), others are marching forward and the biggest questions are when and not if things will change (faster internet, AI improvements, globally large number of retirees, etc.).

3. Does considering macroenvironmental and industry trends affect your thinking about the career you want to pursue after college? Why or why not? Explain.

These types of macroenvironmental trends affect the choices of career field after college due to the fact that many students don‘t want to be at risk of having their jobs eliminated. With businesses recruiting globally for many occupations in this era, it is important to try to work in an environment with job security without the stress of being easily replaced by AI, robots or jobs moving abroad.

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Strategic Management, 6e Teacher‘s Resource Manual

Discussion Questions 1. Why is it important for any organization (firms, nonprofits, etc.) to study and understand its external environment?

It is important because the external environment can affect the industry and firm‘s performance. The PESTEL framework, for instance, is helpful because it acts as a guide, allowing managers to mitigate threats and leverage opportunities accordingly. The five forces model enables the user to understand the determining causes of industry profitability as groundwork for formulating strategies to improve the profitability of a firm within it.

2. How do the five competitive forces in Porter‘s five forces model affect the average profitability of the industry? For example, in what way might weak forces increase industry profits, and in what way do strong forces reduce industry profits? Identify an industry in which many of the competitors seem to be having financial performance problems. Which of the five forces seem to be strongest?

Weaker five forces equal greater industry profit potential, emphasizing attractiveness. However, the greater the five forces are, the lesser the industry profit potential, reducing the attractiveness to competitors. For example, if buyers are weak, the focal industry has more ability to set prices and terms for delivery of products or services and thus keep more profits for itself rather than sharing them with the buyers.

3. This chapter covers the choices firms make in entering new markets. Reflect on ChapterCase3 and discuss how Airbnb might have answered these questions in Exhibit 3.6.

Airbnb tried a few different ways to enter the hotel industry as a disruptor. It started thinking about the service when major events/conferences create shortages in particular urban areas. The U.S. housing crisis was a catalyst for the firm to expand and impacted the timing of its market entry and expansion.

Airbnb is seriously reconfiguring the value chain of traditional hotels and continues to scale even given regulatory push back in some cities. Airbnb expanded the ‗players‘ to include homeowners who wanted to make some extra income. When entering the market Airbnb used a high growth asset / light platform approach.

4. How do mobility barriers affect the structure of an industry? How do they help us explain firm differences in performance?

Mobility barriers affect the structure of an industry because they separate one strategic group from another on the basis of industry-specific factors. They help us explain firm differences in performance between groups of firms in the same industry because it shows a key differentiator between groups within the industry.

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TRM Extra: Ethical/Social Questions 1. One of the world‘s largest car manufacturers, Volkswagen (VW), admitted to criminal wrongdoing in 2017. The firm confirmed that it systematically cheated on emissions tests related to its two-liter diesel engines. These engines were designed in 2005 to meet more rigorous U.S. emission standards taking effect in 2007. Apparently, the new engines did not perform as planned and the company then designed a software feature to artificially pass the emissions testing process. Road testing in 2014 uncovered a large difference between EPA-measured emissions and the actual output of the vehicles. This was then further investigated by several legal entities. In September 2015 the CEO of VW lost his job over the scandal. The financial cost to the firm is currently more than $20 billion and could go above $25 billion in fines and consumer compensation for nearly 11 million vehicles with this ―defeat device‖ software.

1a) The external environment of the global automobile industry is quite complex.

Regulations vary from country to country and in the United States even from one state to another. Firms must be prepared to anticipate and respond to these external forces. It appears VW‘s response to the design issue, in this case, was neither ethical nor legal. Why do you think VW made the decisions it did regarding this emissions problem in the late 2000s? What could VW have done differently?

It seems Volkswagen engineers and managers were under pressure to meet the upcoming emissions changes and decided to take an unethical ―shortcut‖ when their original engine improvements did not meet the goals desired. Students can read up on this further in ―U.S. Indicts Six Volkswagen Executives in Emissions Scandal,‖ Wall Street Journal, January 11, 2017. Also check out the Netflix series Dirty Money (episode: ―Hard NOx‖) for excellent coverage on the scandal.

1b) In January 2017, a U.S. grand jury indicted six current and former VW executives for their alleged role in the emissions scandal and its subsequent cover-up. The U.S. Justice Department decided to bring charges against these executives after a 16-month criminal investigation by the FBI. In the past, it has been rare for executives to be personally indicted for company misconduct. Do you agree with the decision to go after individual managers in this case? Why or why not?

Students may have a variety of viewpoints, but it appears that several executives knowingly directed the creation of and implemented software to cheat the emissions tests. Volkswagen has admitted as much in its plea agreements.

1c) What are the competitive implications of the actions of VW? Does this situation impact the industry rivalry that is discussed in the five forces model, for instance?

Beyond the near-term legal fees and penalties, the action demonstrates the power of a strong regulatory framework supporting the buyers. The fate of the diesel engine program at VW is uncertain and this was viewed as a major competitive advantage for the firm in the marketplace. Buyers may now seek out alternate sources of automobiles and move away from the VW brand.

2. The chapter notes that national governments provide incentives for industry growth. One such example is for the purchase of electric vehicles (EVs). Norway, for example, has provided tax discounts 22 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual for electric vehicles since the 1990s. Norway waives a substantial automobile import tax on EVs sold inside the country. Largely as a result of these policies, 50 percent of the automobiles owned in Norway were electric powered in 2018. This compares with 2.1 percent in the United States, 4.4 percent in China, and 2.5 percent in the United Kingdom. In terms of number of electric cars bought, China leads the world with over one million while the U.S. comes in second with over 350,000 vehicles purchased in 2018.

2a. What is the appropriate role for governments to encourage or discourage certain purchasing behaviors? You may note many national governments have for decades collected additional taxes on tobacco and alcohol products as a measure to try to moderate consumption of these items.

Students will have varying viewpoints on this question. The overall question is really twofold. Should governments try to mold behaviors through taxation (like the ―sin taxes‖ mentioned)? Does the movement of consumers away from internal combustion engines to ‗cleaner‘ electric vehicles merit this sort of government influence? What else (besides a tax break) would influence adoption of electric vehicles? This will get them thinking about PESTEL factors. You may also want to bring up how attitudes towards electric vehicles have evolved over time or how different cultures may have a different relationship to vehicles (e.g., the U.S. love of independence as represented by a vehicle on the road + U.S. manufacturing being closely linked to auto manufacturing).

2b. As a strategist in a major firm, how would you seek to position your company in light of such current and potential future governmental policies?

The prudent organizational leader will want the firm to be prepared for additional government policies in the area of global warming and climate issues more broadly. Staying in the automotive industry, most larger brands have plans to roll out electric vehicles by 2021. The market in much of Europe and China would seem to support many of these moves on a global scale.

TRM Extra: Small Group Activities 1. Your group is a team of KraftHeinz Co. (www.kraftheinzcompany.com) marketing interns. The company has asked you to propose new guidelines for helping it promote food to children in a socially responsible way. As the fifth-largest consumer packaged food and beverage company globally, KraftHeinz‘s 2018 sales exceeded $26 billion. The company projects steady growth but would like your help in boosting growth. One of Kraft‘s largest brands is Oscar Mayer Lunchables, described as making lunch fun and targeted to busy parents who want a quick lunch to send with their children to school or keep on hand as an after-school snack. One of the options is Lunchables with a juice drink, nachos cheese dip, and salsa. However, controversy is growing about the social responsibility of directly marketing to children when the food is unhealthy—high in fat, sugar, and salt, but low in nutrition.

There is a societal concern with the growing rate of obesity in children and the increased incidence of diabetes that results from childhood obesity.

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Strategic Management, 6e Teacher‘s Resource Manual Kraft would like to have a reputation as a socially responsible company. Accordingly, Kraft would like to create internal guidelines that will help it market Lunchables (as well as other packaged food items) responsibly and gain the approval of medical professionals, parents, and watchdog groups.

1a. Visit www.lunchables.com and review the Lunchables products, as well as other packaged food products that Kraft offers. Discuss among your group members the extent to which the product options are healthy choices.

Students are likely to have very strong opinions about the healthiness of food. While few of your students are probably packing lunch for children or personally faced with a childhood obesity problem, they often bring lunch to campus and definitely are focused on issues of fat, additives, and GMO ingredients in the food that they eat both at home and in restaurants. Ask them how what they eat for lunch has changed over the past five years and why they made those changes.

1b. Identify other actions that Kraft might take to demonstrate that it is a food company that genuinely cares about children‘s health and a company that would like to help reverse the trend of increasing childhood obesity.

Solutions proposed here should encompass both new product development and advertising and promotion. You also should require students to tie some of the discussion back to what they learned in Chapter 2, by asking them to review Kraft‘s mission, vision, and values, and determine whether the actions they propose for Kraft in this area are consistent with the firm‘s overarching strategic direction.

1c. If your group believes that the company is not responsible for personal choices that consumers make to eat unhealthy food, then describe how the company should respond to activist groups and public health officials that are urging companies to stop producing and marketing unhealthy foods.

The fact is that a lot of people LIKE carbonated soft drinks, salami, chips, mayonnaise, and other high sodium, high fat, high sugar foods. One individual‘s personal freedom to buy and eat such foods is in direct conflict with efforts by another person‘s efforts to stop firms from making and marketing those products. Is controlling the food we eat (beyond protecting us from toxicity) a suitable role for government?

2. One industry with an impact on both undergraduate and MBA students is textbook publishing.

Traditional printed textbooks are being challenged on one hand by self-publishing firms offering low prices for specific instructor materials and on the other hand by a need to offer digital resources that substitute for printed materials. Large textbook publishers are increasingly investing in adaptive learning systems such as Cengage MindTap, McGraw Hill Connect®, and WileyPLUS. A complicating factor for the publishers is the changing business model of renting textbooks (printed and electronic). U.S. university book rental was about 33 percent of student purchasing volume the start of 2019. E-book sales accounted for about 5 percent total textbook sales in 2018.

Use the five forces model (with complements) to think through the various impacts such technology shifts may have on the textbook industry. Include in your response answers to the following questions.

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Strategic Management, 6e Teacher‘s Resource Manual 2a. How should managers of a textbook publishing company respond to such changes?

Smart business leaders in the textbook industry will not ignore this technological threat to their business.

The user interface experiences of Kindle and iPad are far superior to that of prior notebooks and netbooks. This key complement seems likely to rapidly increase electronic adoption rates by students.

The managers should consider ways of weakening the five forces to achieve a greater industry profit potential with added attractiveness. It is important that managers position their company in a way through partnerships or other means to prepare for direct electronic connections with students.

2b. Will the shifts in technology and business models be likely to raise or lower the textbook industry profits? Explain.

The shifts in technology will be likely to raise textbook industry-level profits if new technology is readily implemented into the current mix. The textbook industry is currently struggling due to rivalry amongst existing competitors. A focus to create tailored products to customers‘ needs should be initiated to be able to increase industry profitability as producers are able to raise prices and revenues. One key point we like to bring out in discussions is who is the buyer of a textbook? The students painfully know they pay the cost of the books but have no choice in the selection of the book. The force of the buyer is really with the instructor. But who is the supplier to the textbook industry? Well, once we get past the paper and binding supplies, which are commodities…the supplier is the ―content provider.‖

Related MiniCase Instructors may want to consider assigning and discussing the following MiniCase, which covers topics found in this chapter. Every MiniCase have assignable McGraw Hill Connect® case questions available.

MiniCase 3: Robinhood: Democratizing Investing or Robbing Investors?

CHAPTER 4 Internal Analysis: Resources, Capabilities, and Core Competencies Teacher Resource Chapter Contents

Teacher’s Resource Manual (TRM): Implementation Guide

ii

Learning Objectives

1 25

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Strategic Management, 6e Teacher‘s Resource Manual Textbook Chapter Contents

2

Chapter Teaching Resources

3

Overview of Chapter

5

Classroom Outline

6

Strategy Highlights

21

myStrategy

22

Discussion Questions

24

TRM Extra: Social/Ethical Questions

25

TRM Extra: Small Group Activities

26

Related MiniCase

27

Teacher’s Resource Manual: Implementation Guide This Teacher‘s Resource Manual (TRM), supports delivery of your chosen curriculum and pedagogy.

This manual contains more than just guidance on how to cover concepts discussed in the sixth edition of Strategic Management; it also provides tips and best practices for how to utilize the full product suite (from the textbook to SmartBook® to Connect®). In addition, this manual includes a variety of supplemental teaching resources to enhance your ability to create an engaging learning experience for your students. Regardless of whether you teach in face-to-face traditional classrooms, blended (flipped) classrooms, online environments, or hybrid formats, you‘ll find everything you need in this improved resource.

The TRM follows the order of the textbook outline for each chapter and is divided into sections for each learning objective. Each section identifies the relevant PowerPoint slides from both the Lecture slides 26 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual and the Supplemental Lecture slides (more on this below). This eases your preparation time for class as you can adjust slides as needed to ensure your students stay actively engaged throughout each session.

WHAT INSTRUCTOR RESOURCES ARE AVAILABLE? Within each section of the TRM you will find an assortment of examples, exercises, Connect® assignments, updates on the latest research, Strategy Smart Video discussions, and discussion questions and exercises from which you can choose to enhance your students‘ learning and engagement.

Within the Connect® Library, you will find the following: In the Test Builder tab, you can create tests from the Test Bank that can be printed or administered within your LMS. In the Instructor Resources, you can access all of the following items:         

Teacher‘s Resource Manual PowerPoints (Accessible) Application-Based Activities‘ accompanying Teaching Notes Create™ Case Support MiniCase Support Sample Syllabi Video Library Capsim‘s Capstone Simulation and Capsim IM Image Bank (for your customized PowerPoints)

22) This Teacher‘s Resource Manual is posted by chapter.

23) Two sets of ADA-accessible PowerPoints are available with each chapter: a. Lecture slides cover chapter concepts and exhibits. b. Supplemental Lecture slides cover: i. ii. iii. iv.

Chapter Cases Strategy Highlights Implications for Strategic Leaders Strategy Smart Video selections (not part of the book, but an additional resource found here) v. Key Terms

24) Test Bank questions, found in the Library tab entitled Test Builder, are posted by chapter. You will find a variety of question types within the test bank such as Matching, Ranking, Multiple Choice, Select-All-That-Apply, True/False, Short Answer, and Essays to test student mastery across Bloom‘s Taxonomy (i.e. Understand, Apply, and Analyze).

25) Create™ Case Support (all cases are available in Create™ and selected ones in HBP) 27 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual a. A case matrix that identifies the industry sector covered by each case, as well as the primary and secondary chapter alignments b. One-page case abstract for quick overview of each case c. Case Teaching Notes for instructor use only d. Case Financials in Excel files for the exhibit data in the most popular cases e. Case Strategic Financial Analysis template f. Instructions on How to Download SEC Financial Data into Excel Spreadsheets 26) MiniCase Support (all MiniCases are located in Part Four of the book) a. MiniCase Teaching Notes comprising suggested answers to the MiniCase discussion questions. In some instances, they also provide specific additional article and video resources to accompany each MiniCase.

27) Video Resources, located in the Video Library, provide links to supplemental video resources to accompany both the MiniCases and full-length Create™ cases, as well as links to all of the assignable videos in Connect®.

28) A link to Capsim’s Capstone Simulation and a Capsim Instructor’s Manual correlated to Strategic Management is provided; this simulation allows students to apply their knowledge of key strategy concepts.

HOW CAN SMARTBOOK® ENHANCE MY STUDENTS’ PERFORMANCE? SmartBook® is assignable through Connect®, McGraw Hill‘s online assignment and assessment system.

One of the first fully adaptive and individualized study tools designed for students, it creates a personalized learning experience, giving students the opportunity to practice and challenge their understanding of core strategy concepts. The reporting tools within SmartBook® show where students are struggling to understand specific concepts.

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Strategic Management, 6e Teacher‘s Resource Manual Typically, SmartBook® is assigned by module (chapter), and instructors can set which learning objectives to cover as well as the number of probes the student will see for each assignment. Instructors also set the number of points a SmartBook® module is worth in the course. Usually, applying a minimal number of points for completion of each module is enough to encourage students to read the chapter.

Many instructors assign these modules to be completed before the class or online session.

SmartBook® provides several diagnostic tools for instructors to gauge which concepts their students struggle to understand. Below is the set of adaptive assignment reports available in SmartBook®:      

Progress Overview: View student progress broken down by module.

Student Details: View student progress details plus completion level breakdown for each module.

Module Details: View information on how your class performed on each section of their assigned modules.

Practice Quiz: This gives you a quick overview of your students‘ quizzes results.

Missed Questions Metacognitive Skills

By selecting ―Module Details‖ the instructor finds the results for the students in the class overall. These details reveal where in the chapters students might be struggling. The module gives the chapter section, average time spent, average questions per student correct/total, and the percentage of correctness (number of assigned items). Information about the most challenging sections for students can help instructors refine the focus of the next classroom or online session.

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Strategic Management, 6e Teacher‘s Resource Manual For more detailed analysis, SmartBook® captures students‘ confidence in their competency using the ―Metacognitive Skills‖ report. Below (a recreation of the Metacognitive Skills report), we find the second student is confident and mostly correct (91% in the correct & aware column) while the first student ―doesn‘t know what they don‘t know‖ (39% in the far-right column).

STUDENT

Student 1 Student 2 Student 3 Student 4 Student 5 Student 6 Student 7 Student 8 Student 9 Student 10

CORRECT and AWARE 61% 91% 81% 83% 76% 66% 77% 91% 93% 70%

CORRECT and UNAWARE 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

INCORRECT INCORRECT and AWARE and UNAWARE 0% 39% 3% 5% 0% 19% 0% 17% 3% 21% 9% 25% 3% 20% 2% 7% 2% 5% 6% 25%

APPLICATION EXERCISES, QUIZZES, AND TEST BANK What resources are available at the book level?

Connect® offers a wealth of content for both students and instructors. Application Exercises require students to apply key concepts to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor. Before getting into chapter-level assignments, let‘s look at the book-level assignments available.

Four exercises are available for instructors to assign beyond the chapter materials. These are 1) MiniCase Case Analyses, 2) Case Exercises, 3) Financial Ratio Reviews, and 4) MyStrategy exercises.

The Financial Ratio Reviews and MyStrategy exercises comprise our new Student Primer in Connect.

13) To encourage analytical thinking, each MiniCase from Part Four of the book is also an assignable application exercise (MiniCase Case Analysis). Each MiniCase is followed by four to five multiple-choice questions that assess students‘ understanding of the key issues presented in the MiniCase.

14) Case Exercises focus on the key symptoms and influences of a problem a firm might be facing, followed by a series of questions that help students understand how the firm eventually achieves a solution to that problem (or asks students to suggest a solution).

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Strategic Management, 6e Teacher‘s Resource Manual 15) Financial Ratio Reviews give students the opportunity to further hone their financial analysis skills; review exercises cover each type of financial ratio (activity, leverage, liquidity, market and profitability).

16) MyStrategy exercises for each chapter provide direct personal applications of strategy concepts to careers and lives to help students internalize the content.

What resources are available for each chapter and how should I integrate them in my course?

Consider assigning one or two Application Exercises per chapter. They are built around chapter learning objectives, so the instructor can choose based on their focus for each specific chapter. Several types of application exercises are available in each chapter. The newest additions are our Animated Videos, comprising three- to four-minute videos on key concepts or concepts that tend to challenge students the most. Each animation is accompanied by three to four multiple-choice questions to check student attention and comprehension. Comprehensive Case Analyses and our new On-Location Video Cases feature firms and industries different than those discussed in the textbook and provide relevant, topical information for students. Finally, Click-and-Drag exercises help students actively demonstrate their understanding of the associated learning objectives. Application Exercises can be assigned as preparatory exercises due before class (this is especially good for flipped classrooms), or after class as concept comprehension checks. Applications Exercises will generally be assigned as homework or practice as part of the overall class grade. A general rule of thumb would be to make application exercises worth 5 to 10 points each since these require time and thought.

To find the Applications in Connect®, go to ―Add Assignment‖ and then select ―Question Bank.‖ Application Exercises are organized by chapter. Instructors have the option to select for one attempt only, but they may want to give students unlimited or multiple attempts on the first few assignments to give students a chance to learn and navigate the system. (As the course progresses, instructors may want to tighten up the time on task and reduce the number of attempts to complete each exercise).

Chapter quizzes and full chapter test banks are available for assignment, and like the Application Exercises, are organized by chapter. The value applied to each question should be relatively low because numerous questions are usually assigned for each chapter. As such, make these questions worth 1 or 2 points each. The feedback given to students is time-flexible. Selecting feedback to be displayed after the assignment due date helps to keep students from giving the correct answers to other students while the questions are still available. For this reason, it is suggested that no feedback to quizzes and test bank exams be made available until after the assignment is due.

When should I assign these digital components?

To fully utilize the power of the digital components, instructors will often assign the SmartBook® reading and adaptive learning probes before class meets. Application Exercises can be completed either before or after class; if they are completed before class, they can sometimes serve as good springboards for class discussions. The chapter quiz makes a good check on comprehension of the material and may work best if assigned after each class period. The test bank serves as a good resource for building midterm or final exams.

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Strategic Management, 6e Teacher‘s Resource Manual More detailed information on SmartBook® and Connect® is available through several resources at McGraw Hill. A good starting point is your local Learning Technology Representative, who can be found here: http://www.mheducation.com/highered/platforms/connect/features-educators.html

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Strategic Management, 6e Teacher‘s Resource Manual

CHAPTER 4 Learning Objectives 4-1

Explain why and how internal firm differences are the root of competitive advantage.

4-2

Differentiate among a firm‘s core competencies, resources, capabilities, and activities.

4-3

Compare and contrast tangible and intangible resources.

4-4

Evaluate the two critical assumptions about the nature of resources in the resource-based view.

4-5

Apply the VRIO framework to assess the competitive implications of a firm‘s resources.

4-6

Evaluate different conditions that allow a firm to sustain a competitive advantage.

4-7

Outline how dynamic capabilities can enable a firm to sustain a competitive advantage.

4-8

Apply a value chain analysis to understand which of the firm‘s activities in transforming inputs into outputs generate differentiation and which drive costs.

4-9

Identify competitive advantage as residing in a network of distinct activities.

4-10

Conduct a SWOT analysis to generate insights from external and internal analysis and to derive strategic implications.

In this chapter, we turn our attention to inside the firm. One of the key messages of this chapter is that a firm‘s ability to gain and sustain competitive advantage is partly driven by core competencies—unique strengths that are embedded deep within a firm. Core competencies allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost. We will analyze why differences in firm performance exist within the same industry and ground this discussion with theory-based analytical frameworks.

To gain a better understanding of why and how firm differences exist within the same industry we describe moving to internal analysis. We then take a closer look at the importance of core competencies.

Next, we introduce the resource-based view of the firm to provide an analytical model that allows us to assess resources, capabilities, and competencies and their potential for creating a sustainable competitive advantage. We discuss the dynamic capabilities perspective, a model that emphasizes a firm‘s ability to modify and leverage its resource base to gain and sustain a competitive advantage in a constantly changing environment. We then turn our attention to the value chain analysis to gain a deeper understanding of the internal activities a firm engages in when transforming inputs into outputs. We 1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual conclude with ―Implications for the Strategist,‖ with a particular focus on how to use the SWOT analysis to obtain strategic insights from combining external and internal analysis.

Text Chapter Contents Chapter Case 4: Five Guys‘ Core Competency: ―Make the Best Burger. Don‘t Worry about Cost.‖ 4.1 From External to Internal Analysis (LO 4-1) 4.2 Core Competencies (LO 4-2) Strategy Highlight 4.1: Yeti’s Core Competency: Making Quality Cool CONNECT® INTEGRATION Case Analysis: Internal Analysis: Looking Inside the Firm of Honda Corp.

4.3 The Resource-Based View (LO 4-3, LO 4-4, LO 4-5, LO 4-6) Strategy Highlight 4.2: Applying VRIO: The Rise and Fall of Groupon CONNECT® INTEGRATION Grouping: Using SWOT Analysis to Gain Strategic Insight CONNECT® INTEGRATION Whiteboard Video: Applying the VRIO Framework 4.4 The Dynamic Capabilities Perspective (LO 4-7) CONNECT® INTEGRATION Multiple Choice: Sustaining Competitive Advantage CONNECT® INTEGRATION Whiteboard Video: Resource Stocks and Flows 4.5 The Firm Value Chain and Strategic Activity Systems (LO 4-8, LO 4-9) CONNECT® INTEGRATION Multiple Choice: Value Chain and Strategic Activity Systems: Five Guys 4.6 Implications for Strategic Leaders (LO 4-10) CONNECT® INTEGRATION Whiteboard Video: The Role of SWOT Analysis in Strategic Action Creation ChapterCase 4 / Part II

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Strategic Management, 6e Teacher‘s Resource Manual CONNECT® INTEGRATION Comprehension Case: Five Guys’ Core Competency: “Make the Best Burger. Don’t Worry about Cost.”

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Strategic Management, 6e Teacher‘s Resource Manual

Chapter Teaching Resources SECTION

Title

RESOURCE TYPE

CHAPTERCASE 4

Five Guys‘ Core Competency Five Guys French Fries

Web Video (1 min)

Diners Are Finding $13 Burgers Hard to Swallow

WSJ article

Disney Reports 10 Million Users for Its New Streaming Service

WSJ article

How Disney Milks Its Hits for Profits Ever After

WSJ article

MiniCase 4: Dr. Dre‘s Core Competency: Coolness Factor

Rothaermel Textbook

Internal Analysis: Looking Inside the Firm of Honda Motor Co.

Connect® Case Analysis

See Google‘s Spectacular New Headquarters Rising in California

Fast Company Article

Small Group Exercise: Brand Value

TRM Extra

Artificial Intelligence Experts Are in High Demand

WSJ article

Applying the VRIO Framework

Connect® Whiteboard Video

Using SWOT Analysis to Gain Strategic Insight

Connect® Grouping

Small Group Exercise: Groupon

TRM Extra

Ethical/Social Issues: Reverse Engineering

TRM Extra

4.1: From External to Internal Analysis

4.2: Core Competencies

4.3: The Resource-Based View

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Strategic Management, 6e Teacher‘s Resource Manual 4.4: The Dynamic Capabilities Perspective A Framework for Building Artificial Intelligence Capabilities

WSJ article

Making it in America: Revitalizing U.S. Manufacturing

McKinsey Report

Ethical/Social Issues: Recruiting Practices

TRM Extra

Sustaining Competitive Advantage

Connect® Multiple Choice

Resource Stocks and Flows

Connect® Whiteboard Video

McDonald‘s Drops Signature-Crafted Burgers

WSJ article

Discussion Question: Value Chain

Rothaermel Text

Value Chain and Strategic Activity Systems: Five Guys

Connect® Multiple Choice

What Is a SWOT Analysis? – Bplans.com

Online Video (3 mins)

The Role of SWOT Analysis in Strategic Action Creation

Connect® Whiteboard Video

Five Guys‘ Core Competency: ―Make the Best Burger. Don‘t Worry about Cost.‖

Connect® Comprehension Case

4.5: The Value Chain and Strategic Activity Systems

4.6: Implications for Strategic Leaders

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Strategic Management, 6e Teacher‘s Resource Manual

Overview of the Chapter 4.1

From External to Internal Analysis Differential firm performance must be viewed from inside the firm‘s resources, capabilities, and core competencies. Exhibit 4.2 shows how and why we move to the firm‘s internal environment.

A dynamic response to external stimuli is required for firms to be successful in the long-term.

4.2

Core Competencies Five Guys is extended from the ChapterCase to discuss building core competencies. Strategy Highlight 4.1 discusses the Seider brothers and their successful company – Yeti. This examples discusses how Yeti built a coveted brand and turned plastic coolers into status symbols. Exhibit 4.3 demonstrates core competencies and applications for several major companies. Finally, this section covers the relationship of resources and capabilities to building core competencies. This is visualized in Exhibit 4.4 with attributes deriving competitive advantage and the need for dynamic feedback.

4.3

The Resource-Based View The Resource-Based View model builds on the concepts of tangible resources and intangible resources illustrated in Exhibit 4.5. The text discusses the value of intangible resources with an example using the Googleplex. The foundational assumptions underpinning the resource-based model are resource heterogeneity and resource immobility. Another key perspective discussed in this section is the VRIO framework discussed in Exhibit 4.6. Five Guys burger restaurant from the ChapterCase opener is used as an example of applying the VRIO framework. The Strategy Highlight 4.2 covers Groupon as another exemplar firm using the VRIO lens. Five conditions to help sustain competitive advantage are presented. These isolating mechanisms can prevent other firms from copying key aspects of competitive advantage.

4.4

The Dynamic Capabilities Perspective The firm operates in an often rapidly changing external environment. Thus, the competencies inside the firm must be adaptable in order to avoid becoming core rigidities. This dynamic capabilities perspective is illustrated with a metaphorical bathtub in Exhibit 4.7. This framework discusses the differences between resource stocks and resource flows as well as their interactions.

4.5

The Firm Value Chain and Strategic Activity Systems A firm performs both primary activities and support activities in the process of converting inputs to outputs for its business. Exhibit 4.8 describes the value chain framework which can be used to analyze these activities. Five Guys is offered as an example firm to elucidate the perspective in a very tangible way. Also, in the section a strategic activity system displays interconnected activities useful in sustaining a competitive advantage. Temporal elements of this framework are described regarding changes Vanguard made by moving into customer segmentation (see Exhibits 4.9 and 4.10).

6

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Strategic Management, 6e Teacher‘s Resource Manual 4.6

Implications for Strategic Leaders The SWOT analysis facilitates the combination of external analysis from chapter 3 with internal analysis here in chapter 4. Exhibit 4.11 presents four key questions firms need to ask and answer in developing strategic alternatives in the SWOT matrix process.

Classroom Outline ChapterCase 4 Five Guys’ Core Competency: “Make the Best Burger, Don’t Worry about Cost” The opening ChapterCase discusses the amazing startup story of Five Guys Burgers and Fries. The firm started with one location in Arlington, VA and an intense focus on providing the highest quality burgers and fries for customers. After 17 years they had five stores all owned and operated by family members.

In 2003, they started franchising across the U.S. By 2019 they had over 1,500 locations open and also had grown internationally. Annual sales are about $2 billion.

INSTRUCTOR SUPPLEMENT SLIDE 2

STRATEGY SMART VIDEO EXAMPLE This one-minute long video from Five Guys https://www.youtube.com/watch?v=0_kVgRxOnCc is about the care the restaurant takes with sourcing its potatoes might be an upbeat way to start class.

ChapterCase 4 Part II The closing ChapterCase provides more information on the meticulous lengths Five Guys uses to ensure the continuation of its high-quality standards in all the franchise locations. For example, third-party audits are performed at each store each week to ensure all the food is fresh and the stores are clean. The firm provides good work conditions for employees especially when compared to other fast food firms.

The firm is intent on staying with its core menu despite being on several lists that indicate the company‘s offerings are among the unhealthiest meals in the United States.

ChapterCase 4 Discussion Questions 1.

Why is Five Guys so successful? Describe Five Guys‘ core competency, then

explain how the company built it, and why it is essential to its success.

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Strategic Management, 6e Teacher‘s Resource Manual Five Guys‘ relentless focus on quality has built a cult of customers who love the products. The company has a core competency of excellence in supply chain as seen by delivering a customized, made-to-order burger and hand-cut fries with the highest quality ingredients available. The founders adhered to this approach even in the face of major supply disruptions caused by hurricanes when many other firms would have found alternative solutions. The company also maintains a central focus on a basic menu and thus limits new product development to sustain distinction in the food it offers.

2.

Five Guys‘ success led to imitation attempts by more recent entries in the fast-casual ―better burger‖ segment of the restaurant industry such as BurgerFi, Shake Shack, and Smashburger. Do you think these new entrants are competitive threats to Five Guys? Why or why not? If you think they are competitive threats, what should Five Guys do about it, if anything? Explain.

Students will have a variety of viewpoints on this question. There is little doubt the increase of the ‗better burger‘ segment is a competitive threat to Five Guys. The barriers to entry are relatively low especially for local and regional franchises. If these newer burger focused firms are successful at peeling off a portion of the Five Guys fans, then price may become more of a competitive tactic. This moves the industrial segment closer to becoming a commodity and endangers the differentiation Five Guys has maintained thus far. Students arguing against the new competitors being a threat may point to the growth of the overall market segment allowing room for more competitors without large impacts to the Five Guys business. They may also point to a leadership position the Five Guys has in development of effective supply systems across the U.S. Five Guys has refined its value chain for areas of differentiation and ‗doing things differently‘ from other competitors. One key question is are these differences in harmony with future trends or fighting against them. No drive-thru and no delivery in a take-out environment may or may not work well in the next decade.

3.

Do you think a trend toward more healthy eating is a threat to Five Guys? If so, what could the company do about it? For example, should the company change its menu to include healthier choices, or should it continue with what made Five Guys so successful?

Explain, using Exhibit 4.11 to guide your response.

Five Guys has many strengths in reputation and operations within the ―better burger‖ market segment.

The question is whether these strengths can be used to make the healthier eating trends into an opportunity rather than a threat. McDonalds has spent many years and millions of dollars in trying to attract younger more health-conscious customers with limited success to date. A couple of options for continued success at Five Guys would be to continue to build its brand as a high-quality burger restaurant and maintain high profits in a perhaps slowing growth segment; or Five Guys could look to bridge into a targeted health food category as a complement for those groups that include both burger and vegetarian lovers. The narrow menu may be considered a weakness in the broader fast casual segment, but it seems more a strength in the ―better burger‖ space. One large threat is that the burger space will not grow as fast as other restaurant segments and thus increase rivalry among the growing competitors.

4.

Do you think Five Guys will be as successful outside the United States as it has been in its home market? Why or why not?

8

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Strategic Management, 6e Teacher‘s Resource Manual Five Guys will need to be careful in assessing which international markets to explore and how to enter them to continue international growth. Already in countries as diverse as Canada and Kuwait, they have experiences to build upon that many other ―better burger‖ firms do not. However, it is difficult to see many other foreign markets that are as interested in ‗better burgers‘ as the United States. Thus while there is growth as a novelty and the company has some level of cult fans, the market penetration levels may not be as deep. Five Guys has the advantage of many of the fast food burger firms having moved internationally decades ago. They can study that roadmap for signs of success and challenges.

4.1 FROM EXTERNAL TO INTERNAL ANALYSIS LO 4-1 Explain why and how internal firm differences are the root of competitive advantage.

LECTURE SLIDES 5– 7 EXAMPLES LECTURE SLIDE 6 You might want to begin your discussion by returning to the illustration of peeling back layers of an onion to show students the strategic analysis process of beginning in the broad macroenvironment, closing into the industry environment, and then finally reaching the firm environment. This is also an opportunity to show how the material in Chapter 4 extends on what was discussed in Chapter 3. You may want to find two examples of firms in the same industry that have very different performance/success outcomes (e.g., Walmart vs. Kmart). How has one firm succeeded where another firm has failed? This will naturally steer the conversation and focus toward what is happening inside the firm rather than external factors. Refer to Exhibit 4.2 to help students put external and internal analysis in context. Core competencies allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost. The important point here is that competitive advantage can be driven by core competencies.

As an example, article building on the Five Guys ChapterCase, here is a Wall Street Journal article that discusses the growth in fast casual burger restaurants from 2005 to 2015: Diners Are Finding $13 Burgers Hard to Swallow. The article also has a graphic of the estimated cost of a hamburger that students may find interesting.

You can use Exhibit 4.2 to cover some other examples of core competences before building to a video or a small group activity.

4.2 CORE COMPETENCIES LO 4-2 Differentiate among a firm‘s core competencies, resources, capabilities, and activities.

LECTURE SLIDES 8– 11

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Strategic Management, 6e Teacher‘s Resource Manual The Five Guys chapter opener, the Strategy Highlight about Yeti, and the list of firms in Exhibit 4.3 provide numerous opportunities for class discussion on examples of core competencies with which the students may be familiar.

You can use Exhibit 4.4 to cover some other examples of core competences before building to a video or a small group activity. The presence of the feedback Reinvest, Hone and Upgrade in this figure is a subject we find helpful to discuss in the class using some of the above exemplar firms. What do they invest in to sustain their core competencies?

Strategy Highlight 4.1 Yeti‘s Core Competency: Making Quality Cool Click here for a summary of the Strategy Highlight covering the core competency of Yeti and why consumers are willing to pay 10 times the price of a regular cooler for one of Yeti‘s products.

INSTRUCTOR SUPPLEMENT SLIDES 5: YETI’S CORE COMPETENCY: MAKING QUALITY COOL: STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 14 Steve Jobs and Bill Gates describe core competency development in this video, ―D 2007 Steve Jobs and Bill Gates Historic Interview.‖ CLASS EXERCISES Encourage students to work in small groups to develop a list of resources for a simple case, then a list of capabilities. When they have spent a few moments on this, call on various groups to allow you to create a list of resources and capabilities on the board. Then explain how resources work in concert with capabilities. As an example, using the Microsoft MiniCase2, you might discuss how Microsoft became content with the success of its operating system (Windows) and failed to continue to innovate. Its competitors (Apple, Meta, Alphabet) continued to grow and develop, pursuing both process and product innovations. It may be helpful to assign different companies to different groups and compare the resources/capabilities across companies. The appointment of Satya Nadella as Microsoft‘s CEO represents a ―refresh‖ of the company, and the focus of Microsoft has changed. Direct student discussion towards what types of resources/capabilities Microsoft will need to pursue technologies such as mobile and cloud computing. This case also highlights how difficult it is to change resources and capabilities (dynamic capabilities) and can provide an excellent discussion of how and why it is difficult for firms to change what they do. This case also provides an excellent opportunity to link strategic leadership, strategic initiatives, and resources/capabilities.

Teacher Resource Extra: Discussion Topics Disney offers a great subject for a discussion of leveraging core competencies across multiple product lines and industries. With the introduction in Fall of 2019 of its much-anticipated Disney Plus streaming service, Disney adds a new branch to its tree of businesses. See The Wall Street Journal article, ―Disney Reports 10 Million Users for Its New Streaming Service,‖ How can Disney build from its current core 10 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual competencies to build and sustain a successful streaming business? The company‘s strategy of focusing its business around ―franchises‖ is designed to maximize the benefits of this effort in a Wall Street Journal article, ―How Disney Milks Its Hits for Profits Ever After.‖ Using the Frozen franchise as an example, ask students to discuss the risks of having a large portion of revenue tied to each single key resource, especially one that is tied to the consumer preferences of children. How might Disney mitigate that risk (beyond broader diversification)? For college students, the Marvel Cinematic Universe (MCU) or the Star Wars franchises may be more salient examples. Additional, this article discusses how Marvel/Disney succeeded where DC Comics (Batman, Superman, etc.) failed: Why Marvel‘s Connected Universe Succeeded and DC‘s Failed. This could be used to tie the concepts in this section back to what students learned in Chapter 2, the traits and competencies of a firm‘s leaders are critical competencies for a firm‘s success.

Additionally, MiniCase 4: Dr. Dre‘s Core Competency: Coolness Factor is a good fit for topics covered in this section of the text. This short case covers the founding of Beats and brings out examples of Beats astutely launching endorsements and product deals with both musicians and athletes like Justin Bieber, Lady Gaga, Lebron James, and Cristiano Ronaldo. Beats built a core competence in ―coolness.‖ Apple‘s decision to acquire Beats for $3 billion can be attributed to three main reasons. First, Apple‘s brand is becoming stale, and a motivation for the acquisition may be to gain access to Beats‘ coolness and relevance. Second, Apple‘s iTunes faces increasing competition and disruption from streaming services. Beats‘ founders Dr. Drew and Jimmy Iovine may provide industry-specific knowledge that helps Apple weather the storm. Last, after the loss of Steve Jobs, Apple has lacked a creative and cultural figurehead. Dr. Dre, a titan in the music industry, may be able to fulfill that role. This case does an excellent job highlight intangible resources. MiniCase 4 includes five discussion questions in the textbook. There is also a CONNECT® exercise available that instructors can assign for each MiniCase in the text.

INTEGRATION Case Analysis: Internal Analysis--Looking Inside the Firm of Honda Corp.

This case analysis and multiple choice activity uses a brief case on the resource-based view of Honda. It complements the book‘s discussion about core competencies. The student must read the textbook and also the case provided here. Then, the student will complete a related quiz with three questions. 

Difficulty: Medium  Blooms: Apply

Follow-Up Activity: The instructor can expand on the concepts from this application exercise by comparing the concepts of competencies and resources. Students will often benefit from a discussion of the differences between intangible resources and competencies. Student groups can be assigned one of the intangible resources in Exhibit 4.5 and develop some core competencies that could develop using this resource.

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Strategic Management, 6e Teacher‘s Resource Manual LECTURE SLIDES 12 –18 LO 4-3 Compare and contrast tangible and intangible resources.

EXAMPLES In 2017, Google received permission to start constructing a new dome-shaped complex in Mountain View, CA. The futuristic site is under construction in 2019 and photos of the massive building can be found in this news article about the building from FastCompany, See Google‘s spectacular new headquarters rising in California. However, Google is also investing in a number of other buildings in the Bay Area. The firm is creating plans for an HQ2 building a few miles away from the Mountain View main headquarters. Google has submitted plans for an 80-acre project with over 7 million square feet of office space in San Jose as reported in this CNBC article, Google expands plans for its massive second headquarters in San Jose. It seems clear Google considers the advantages of the Northern California location to be more of an advantage than a disadvantage. Is this an indication they value the intangible benefits more than the tangible drawbacks?

CLASS EXERCISES Assign each of the examples in Exhibit 4.3 to a different team and ask them to develop a list of the tangible resources, intangible resources, and capabilities that are needed to deliver the core competency of the firm.

DISCUSSION TOPICS To augment the textbook‘s description of the reasons that intangible resources are more likely to lead to competitive advantage than external resources, it may be interesting to discuss the challenges of managing key resources that are largely intangible. Two things to emphasize are ownership and control.

Contrast manufacturing equipment, such as a superior performing heat exchanger, with brand value or knowledge stocks, such as a deep understanding of the relationship of a range of chemical drugs to the disease conditions that they are designed to treat. When you go home in the evening and then come back to the plant, your heat exchanger is still there, bolted to the ground. Your knowledge stocks, although you may own them (through employee contracts) and they may be documented in patents and other firm codified knowledge, the bulk of their value is in the minds of employees who could retire or change employers at any time. Your equipment is going to operate the same way today as it did yesterday and basically do what it is told to do. Your employees may have new ideas that they are not motivated to share at work. Although your brand value is recognized as good will on your balance sheet, it lies fundamentally in the minds and perceptions of your customers. This perception is entirely out of your control. You may be able to influence how customers perceive your brand, but you cannot control it or otherwise exercise your ―ownership‖ to improve it.

TEACHER RESOURCE EXTRA:

SMALL GROUP EXERCISE

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Strategic Management, 6e Teacher‘s Resource Manual Click here for a suggested small group activity around brand valuation as an example of an intangible asset.

LO 4-4 Evaluate the two critical assumptions about the nature of resources in the resource-based view.

STRATEGY SMART VIDEO LECTURE EXAMPLES Invite students to identify examples of resource heterogeneity within an industry: For example, compare the search algorithm capability of Microsoft (Bing) versus Google or the economies of scale of Walmart versus Target, or the app store content for Android, Apple, and Microsoft.

Invite students to identify examples of resource immobility within an industry: For example, long patent lives for proprietary drugs, long-term licenses for access to petroleum reserves (usually 20 years or more), trademark protection for valuable Disney characters, or copyright protection for the Harry Potter books and licensing.

LO 4-5 Apply the VRIO framework to assess the competitive implications of a firm‘s resources.

EXAMPLES We recommend describing each of the four characteristics of the VRIO analysis separately in your discussion. Of note is that the fourth characteristic is actually about the organization or firm itself rather than its resources. This point is often difficult for students to grasp, as they are often not used to ordering their thoughts into levels of analysis, so it is worth emphasizing.

In some instances, firms are able to create a competitive advantage but fail to capture it because of actions of their stakeholders. This sounds like a contradiction, doesn‘t it? It is not. Consider this: Once a firm has created a competitive advantage, a battle can ensue over how the spoils of that competitive advantage are split among the firm‘s different stakeholders. In the US car industry, the United Auto Workers (UAW) union had such a stronghold on GM, Chrysler, and Ford that some argue they were a major factor in creating a competitive disadvantage (although management signed the labor contracts with the unions). This dynamic continues in the 21st century as the UAW contentiously negotiated with the Detroit Big 3 and reached agreements with all three in 2019 as reported in this CNBC article (a oneminute video is embedded in the article), UAW approves labor deal with Fiat Chrysler, closing unprecedented talks with Big 3 Detroit automakers marked by a strike, corruption and litigation. By capturing value, the employee stakeholders sometimes leave less value for other stakeholders, such as stockholders or customers.

When resources are rare, firms can buy them, build them, or develop an alliance to share them. An example to illustrate this is artificial intelligence capability from The Wall Street Journal, ―Artificial Intelligence Experts Are in High Demand.‖ This article compares the alternatives of engaging in a bidding war for talent versus partnering with a university to develop new talent.

Use the leading video game consoles, Sony‘s PS5, Microsoft‘s Xbox One, and Nintendo‘s Switch, to illustrate Exhibit 4.6. Sony and Microsoft tend to compete on stronger technological prowess, a larger library of games, and deeper pockets of cash. On the other hand, Nintendo has over the years created 13 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual and nurtured a valuable, rare, and hard-to-imitate resource: a deep understanding of the casual gamer that has enabled Nintendo to develop products that respond to the casual gamer‘s preferences. With the introduction of its Wii game console, Nintendo‘s knowledge of the ―casual gamer‖ became a valuable resource. The Wii console has the unique feature of a wireless handheld pointing device that can detect movements in three dimensions. This unique feature allows Nintendo to court a broader demographic, thereby continuing to expand Nintendo‘s knowledge of its customer base and strengthening its basis for competitive advantage. Nintendo‘s deep knowledge about the casual gamer is also rare, as Sony and Microsoft have largely ignored this market segment. It is difficult to imitate as well since that knowledge has been built over such a long period of time. Like Apple, Nintendo tightly integrates hardware and software to enhance the user experience, and thus it is organized to exploit its deep knowledge of the casual gamer. That knowledge of its customer is therefore a VRIO resource, allowing it to gain a competitive advantage in the hotly contested video-game market. Yet, the competition is not standing still. Microsoft and Sony have introduced motion features in their latest video game consoles and all have enhanced animation capabilities. This example gives you an opportunity to discuss the durability of competitive advantage and open up a dialogue on why Nintendo‘s advantage lasted so many years. There are also new entrants into this field. Nintendo may find that casual gamers are no longer interested in gaming that requires specialized hardware, instead choosing games on their mobile phones. Additionally, there are new entrants like Meta‘s Quest 2 (virtual reality gaming) challenging Sony and Microsoft.

CLASS EXERCISE The equipping of industrial and everyday products with sensors, processors, Internet connections, and user interfaces is radically changing the competitive landscape in the microprocessor and software industries, but also in many manufacturing industries, mobile devices, and in consumer marketing.

McKinsey Quarterly has published a series of articles about the ―Internet of Things.‖ One way to use this topic for discussion in your classroom would be to assign each team of students a different article. Begin with small group discussion of the implications to be drawn from their particular assigned article. Then, invite a broad group discussion on: (1) industries that are impacted, (2) what the PESTEL analysis tells you about how and why the profitability in these industries is changing, and (3) what the five force model tells you about how and why the profitability in these industries is changing.

Some possible McKinsey & Company articles are: ―An Executive‘s Guide to the Internet of Things‖; ―Unlocking the Potential of the Internet of Things‖; ―How the Internet of Things Could Transform the Value Chain‖; ―The Internet of Things: Sizing Up the Opportunity‖; ―GE‘s Jeff Immelt on Digitizing in the Industrial Space‖; ―Consumer View on Connected Homes.‖

INTEGRATION Whiteboard Video: Applying the VRIO Framework This activity builds student comprehension of the use of VRIO analysis using Southwest Airlines as an example firm. It discusses a variety of resources and steps through a VRIO of the firm. 

Difficulty: Medium

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Strategic Management, 6e Teacher‘s Resource Manual

INTEGRATION Grouping: Using SWOT Analysis to Gain Strategic Insight This activity will demonstrate students‘ understanding of SWOT analysis by placing each strategic alternative in the appropriate classification section. As managers, they must be able to determine both the internal and external forces that impact their business. 

 Difficulty: Medium Blooms: Blooms: Apply

Strategy Highlight 4.2 Applying VRIO: The Rise and Fall of Groupon Click here for a summary of the Strategy Highlight covering the VRIO framework applied to Groupon.

INSTRUCTOR SUPPLEMENT SLIDE 6: APPLYING VRIO: THE RISE AND FALL OF GROUPON

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity for some team discussion on how to help Groupon navigate the current electronic coupon environment.

In 2019, Groupon had a rough year on the stock market despite the overall S&P hitting several record highs. Rich Williams has been CEO since fall of 2015 and is thought to be pursuing some sort of acquisition or merger. This Wall Street Journal article notes the Fall ‘19 market cap for Groupon is under $2B and they may try to buy or merge with Yelp; Groupon Said to Be Pursuing Acquisition as Business Faces Pressure From Investors.

Next you may want to broaden the discussion to talk more historically about why a firm that is moving from a start-up mode to a maturing market environment might need a different CEO. Current CEO Rich Williams gave an interview, ―Groupon CEO Warns Young Executives to ‗Beware of the Limelight,‘‖ on CNBC discussing the difficulties the firm is overcoming. How do the capabilities that a firm needs from its leader change as the company and industry mature? Changes at Meta (regarding Sheryl Sandberg and Mark Zuckerberg) may be another salient example and also link back to Chapter 2‘s learning objectives.

LO 4-6 Evaluate different conditions that allow a firm to sustain a competitive advantage.

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Strategic Management, 6e Teacher‘s Resource Manual EXAMPLES There are five conditions above and beyond core competencies that can help a firm protect and sustain a competitive advantage. If one of any of these five is present, the firm can strengthen its basis for competitive advantage, increasing its chance to be sustainable over a longer period of time. We find students generally ―get‖ the ideas behind the first two ways to protect competitive advantage (better expectations and path dependence); however, some students may need some additional explanation of the differences between causal ambiguity and social complexity. In some sense, this is natural because there is a relationship between these two items. Social complexity can be one reason for causal ambiguity.

But if we think of a firm‘s key processes, such as that of Vanguard or Southwest Airlines, we can see this differentiation more clearly. The complexity is represented by multiple systems working together.

Causal ambiguity, on the other hand, is pointing to the fact that we can‘t identify within the firm specifically how the firm has been able to be successful. Vanguard‘s mission is ―to help clients reach their financial goals by being the world‘s highest-value provider of investment products and services.‖ Vanguard pursues its mission through its unique set of interconnected activities: strict cost control, direct distribution, low expenses with savings passed on to clients, offering of a broad array of mutual funds, efficient investment management approach, straightforward client communication and education, and customer segmentation. Vanguard is now one of the largest investment-management companies.

This allows Vanguard to benefit from economies of scale (e.g., cost savings accomplished through a larger number of customers served and a greater amount of assets managed), further driving down cost.

In turn, by lowering its cost structure, Vanguard can offer more customized services without raising its overall cost. Despite increased customization, Vanguard still has one of the lowest expense ratios in the industry. Even in a changing environment, the firm continues to pursue its strategy of low-cost investing combined with quality service. If firms add activities that don‘t fit their strategic positioning (e.g., if Vanguard added local retail offices in shopping malls, thereby increasing operating costs), they create ―strategic misfits‖ that are likely to erode a firm‘s competitive advantage. SWA uses activities such as frequent and reliable departures, limited in-flight passenger service, low ticket prices, short-haul pointto-point flights using secondary airports, flying only one type of aircraft (which reduces pilot training time and maintenance cost), high aircraft utilization, and a lean, highly productive, and highly motivated ground and gate crew. Each core activity, in turn, is supported by a number of other activities. For example, the core activity of a lean, highly productive, and highly motivated ground and gate crew is supported by stock compensation plans and flexible contracts and work hours. Ideally, the activities pursued are consistent with one another, and complement and reinforce one another.

An example of path dependence: the U.S. customary system of measurements using miles, pounds, gallons, and so on was established in the 1820s. Today, the United States is the only industrial nation in the world not using the metric system as the official method of measurement, putting it at a disadvantage in some cross-border transactions and negotiations.

DISCUSSION TOPICS Chipotle offers a good example for a discussion of barriers to imitation. You can assign this WSJ article, ―Inside Chipotle‘s Kitchen: What‘s Really Handmade?‖ or show the associated video. Take the discussion through stages starting with identification of resources and capabilities, then VRIO analysis, and finally barriers to imitation.

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Strategic Management, 6e Teacher‘s Resource Manual Teacher Resource Extra:

Ethical/Social Issues Click here for information on an extended discussion about the ethics of reverse engineering products in the marketplace. The narrative includes services such as search engine deconstruction by competitors.

The reading also brings up questions about Google‘s decision in 2010 to move its servers out of China and effectively leave that market versus some more recent interest in regaining some ground in the Chinese market perhaps including censoring searches as required by the Chinese communist government. This may also lead to a discussion linking back to Chapter 2‘s exploration of firm values. Is Google living up to its value of ―Do no evil.‖ if it pursues censored search in China?

4.4 THE DYNAMIC CAPABILITIES PERSPECTIVE LECTURE SLIDES 19–23 LO 4-7 Outline how dynamic capabilities can enable a firm to sustain a competitive advantage.

EXAMPLES For a firm to sustain advantage over time, any fit between its internal strengths and the external environment must be dynamic. The firm must be able to change its resource base and activity system as the external environment changes. Dynamic capabilities are essential to gain and sustain competitive advantage.

The capabilities critical to success in an industry change over time in response to changes in both the firm and the industry, as suggested in many examples in Chapter 3. There are many firms that are adapting to technology and social changes and some that are not. One large area of challenge for firms in the dynamic capabilities space is the field of artificial intelligence (AI). AI is likely to produce many new business opportunities in the years ahead. Firms just don‘t know exactly where those opportunities will be! One discussion of this is in a Wall Street Journal article, A Framework for Building Artificial Intelligence Capabilities.

In Exhibit 4.7, the investments can be several different types. It could be money, but it could also be people or time invested in building intangible resource stocks. The outflow can be key employees who leave the organization or the lack of organizational memory, causing the same lesson to be learned several times.

The changing U.S. industrial base offers a good example of resource heterogeneity. The Midwest region in the United States has been called the ―rust belt‖ due to the changing manufacturing landscape and the challenge of firms and cities to adapt to new industries while mourning the death of old ones. Here is a McKinsey report on the manufacturing sector, Making It in America: Revitalizing U.S. Manufacturing.

Many U.S. urban areas are also trying to revamp their economic base. Here is a Wall Street Journal article about such efforts in Erie, Pennsylvania: Erie Hit ‗Rock Bottom.‘ The Former Factory Hub Thinks It Has a Way Out. 17 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual If all of these tech industry examples lead students to think that technology and manufacturing competencies are the only ones that need to be able to respond dynamically to changes in the environment, consider the example of Coca-Cola, who switched from a carbonated soft drinks portfolio to one diversified into water, juice, and energy drinks to respond to a consumer trend toward healthier beverages. This discussion is also a good link to the material covered in Chapter 3 with changing sociocultural trends.

INTEGRATION Multiple Choice: Sustaining Competitive Advantage This activity will show students their understanding of external forces that can be disruptive to a company‘s competitive advantage. As managers, they must be able to determine when it is necessary to adjust or change core competencies to match new market realities 

Difficulty: Medium  Blooms: Apply

INTEGRATION Whiteboard Video: Resource Stocks and Flows Dynamic capabilities can be understood as the resource stocks and flows that help drive a firm‘s competitive advantage over time. 

Difficulty: Medium  Blooms: Apply

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for information on ―poaching of employees‖ by one firm on another. When do effective recruiting practices veer info unethical behavior by the hiring firm?

4.5 VALUE CHAIN AND STRATEGIC ACTIVITY SYSTEMS LECTURE SLIDES 24–31

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Strategic Management, 6e Teacher‘s Resource Manual LO 4-8 Apply a value chain analysis to understand which of the firm‘s activities in the process of transforming inputs into outputs generate differentiation and which drive costs.

Porter discussed the value of doing different things in the value chain model. While making hamburgers may not seem to be that difficult, a Wall Street Journal article notes that McDonald‘s dropped three signature burgers after less than two years in the market and at least part of the reason was to streamline its operations, particularly the drive-thru. McDonald‘s introduced these hamburgers in an attempt to compete with ―better burger‖ firms like Five Guys. McDonald‘s Drops Signature-Crafted Burgers.

Remember that Five Guys and many of the other high-end competitors do not incorporate a drive thru option in their restaurants.

EXAMPLE The value chain describes the internal activities a firm engages in when transforming inputs into outputs.

The concept is general enough to be applied to basically any firm, from those in old-line manufacturing industries to those in high-tech ones or even service firms. We find that fewer students today have actually seen something ―made.‖ This can create some confusion regarding the differences between primary and support activities. You may ask if any of the students have worked in any sort of manufacturing or process-related business. Using an example of a product or service will help the students frame the differences between primary and support functions. There is also a discussion question at the end of the chapter (and towards the end of this teaching resource manual) which covers key elements of the Five Guys value chain.

LO 4-9 Identify competitive advantage as residing in a network of distinct activities.

Activity systems can be an effective way to show the level of ―fit‖ of the firm‘s activities. Strategic activity systems are socially complex. While one can observe several elements of a strategic activity system, the capabilities necessary to orchestrate and manage the network of activities cannot be so easily observed and therefore are difficult to imitate.

INTEGRATION Multiple Choice: Value Chain and Strategic Activity Systems—Five Guys This activity will give students an understanding of the value chain and how each activity adds value to a finished product and the corresponding costs associated with that added value. And to identify, within this network of distinct activities, how to create a competitive advantage. 

Difficulty: Medium  Blooms: Apply

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Strategic Management, 6e Teacher‘s Resource Manual

4.6 IMPLICATIONS FOR STRATEGIC LEADERS LO 4-9 LO 4-10 Conduct a SWOT analysis to generate insights from external and internal analysis and to derive strategic implications.

INSTRUCTOR SUPPLEMENT SLIDES 8 EXAMPLE This lecture, ―What Is a SWOT Analysis? – Bplans.com‖ on SWOT analysis by Caroline Cummings, VP Business Development at Palo Alto Software can be used to introduce the topic with a business spin.

DISCUSSION TOPICS We bring together the concepts of this chapter‘s internal analysis with those of Chapter 3 about outside the firm in the SWOT analysis. In addition to simply using the SWOT analysis appropriately, an additional step is required to make it a truly useful tool in the strategic management process: making decisions about how to create competitive advantage from the elements listed in the SWOT categories. It is for this reason we bring in the SWOT matrix tool here. The matrix adds alternatives, which are developed from the SWOT elements. Alternatives build plans that match the organization‘s strengths to its opportunities, minimize or address its weaknesses, and compete in the face of its threats. Exhibit 4.11 provides key questions for managers to consider as they construct a SWOT analysis. You may want to use one of the MiniCases in the text as a basis for inviting students to brainstorm alternatives for each box in the diagram.

INTEGRATION Whiteboard Video: The Role of SWOT Analysis in Strategic Action Creation This activity builds student comprehension of the use of the SWOT Matrix using McDonald‘s as an example firm. It discusses for example, adding all day breakfast to the locations as a strategic move for the firm. 

Difficulty: Medium  Blooms: Apply

Strategy Highlights Strategy Highlight 4.1 Yeti‘s Core Competency

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Strategic Management, 6e Teacher‘s Resource Manual This highlight discusses the history of Yeti and its founders: Roy and Ryan Seider. Begun as an answer to poorly constructed coolers, the Seider brothers set out to create a durable cooler that could withstand a wide variety of outdoor activities (e.g., hunting, fishing, camping, etc.). Using a technique called rotational molding, they were able to create a nearly indestructible cooler that would store ice in the hottest of conditions. However, Yeti coolers retail for more than 10 times the price of ordinary coolers.

This highlight discusses how Yeti‘s core competencies of superior quality, performance, and a coolness factor have yielded great success.

Strategy Highlight 4.2 Applying VRIO: The Rise and Fall of Groupon This highlight discusses the history of Groupon. It was founded in 2008 and was very early a massive success with over 260 million subscribers in 50 countries. In early 2011 Google offered to buy the firm for $6B. Groupon declined this offer, and they proceeded with a successful IPO later that same year.

However, Groupon went from a market cap of $16B at the IPO to under $2B just one year later. Using the VRIO framework one finds that the Groupon model was fairly easy to imitate and between the Google purchase offer and the successful IPO there were many financial incentives for new competitors to enter the marketplace. Also looking back to Chapter 3, Porter‘s Five Forces would find that there were low entry barriers into the market which will tend to lower the average profits.

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INTEGRATION Comprehension Case: ChapterCase—Five Guys‘ Core Competency: ―Make the Best Burger.

Don‘t Worry about Cost.‖ Here, we provide both Parts 1 and 2 of this case, accompanied by short-answer questions that students can complete and submit. Due to the nature of these open-ended questions, they require manual grading. 

Difficulty: Medium  Blooms: Apply

my Strategy Here, we encourage the student to take what they have learned about competitive advantage and apply it to his/her own career. Encourage students to spend a few minutes looking at themselves to discover their own competitive advantages.

1. Write down your strengths and weaknesses. What sort of organization will help you leverage your strengths and keep you highly engaged in your work (person–organization fit)? Can some of your weaknesses be mitigated through additional training or mentoring from a more seasoned professional?

Some of our students who are looking for the ―what to do after graduation‖ have found this exercise to be a useful way to think about what they are good at and what they would probably want to stay away from as far as a future career.

2. Think about your personal capabilities and how they have evolved over time. Are your strengths and weaknesses different today from what they were five years ago? What are you doing to ensure that your capabilities are dynamic?

Many students find college to be a time of growth and upgrading of skills both in and outside of the classroom. Be sure to encourage your students to think about the ―softer‖ side of growth, such as presentation skills, self-confidence, etc.

3. Are some of your strengths valuable, rare, and costly to imitate? How can you organize your work to help capture the value of your key strengths (or mitigate your weaknesses)? Are your strengths specific to one or a few employers, or are they more generally valuable in the 22 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual marketplace? In general, should you be making investments in your human capital in terms of company-specific, or in terms of your market-general skills?

This exercise can involve a bit of ―thinking outside the box‖ for some students, but a number of them who have taken it seriously have reported some new findings about how to build and promote their strengths.

4. As an employee, how could you persuade your boss that you could be a vital source of sustainable competitive advantage? What evidence could you provide to make such an argument?

Encouraging students to do an activity systems map (such as the Vanguard example) can be a quite useful experience for both the student and the firm (if they are currently employed there). Some organizations have used these maps to recognize some non-value-added activities that they could modify or even eliminate. Knowing how your job fits in the scheme of things for the firm can be very enlightening.

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Strategic Management, 6e Teacher‘s Resource Manual

Discussion Questions 4. Why is it important to study the internal resources, capabilities, and activities of firms?

What insights can be gained?

Studying what happens within the firm gives managers the ability to formulate a tailored strategy for their company according to the resources, capabilities, and activities available to address external issues for the firm. By using internal analysis tools such as VRIO and activity systems, managers can gain the insight of evaluating a firm‘s current situation and seek to update the firm‘s strategic fit with the environment.

5. Conduct a value chain analysis for Five Guys. What are its primary activities? What are its support activities? Identify the activities that add the most value for the customer. Which activities help Five Guys to build its differentiated brand? Explain.

Five Guys has several distinctive primary activities. For example, they source ingredient suppliers by quality without consideration for the costs of the product provided. This allows Five Guys to offer the freshest and often local foods and ingredients in their restaurants. They also focus on the equipment and layout in the kitchen of each location. This is equivalent to the production line of a manufacturing firm and is a major primary activity of this business. The ample kitchen equipment results in expertly grilled patties and toasted buns for their superior hamburgers. Support activities include the meticulous franchising details that Five Guys uses to ensure each location keeps the differentiated brand image and product quality at the highest level. There are likely corporate activities for locating new sites and managing HR systems that are also key supporting actions in this industry. The activities that bring the most value for Five Guys relate to the customer experiencing the best meal possible each and every time they place an order. This premier experience raises the customer‘s willingness to pay and allows Five Guys to charge higher prices for its burgers, fries and shakes.

6. The resource-based view of the firm identifies four criteria that managers can use to evaluate whether particular resources and capabilities are core competencies and can, therefore, provide a basis for sustainable competitive advantage. Are these measures independent or interdependent? Explain. If (some of) the measures are interdependent, what implications does that fact have for managers wanting to create and sustain a competitive advantage?

These measures are largely interdependent. A resource that is rare but not valuable is not going to help drive any competitive advantage for the firm. This implies the management team needs to be focused on steps to support each of the four stages of VRIO to get to a sustained competitive advantage. Further the criteria are sequenced in as much as resources that are not valuable will not likely be imitated as there is little advantage to be gained.

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TRM Extra: Ethical/Social Questions 1. As discussed in this chapter, resources that are valuable, rare, and costly to imitate can help create a competitive advantage. In many cases, firms try to reverse-engineer a particular feature from a competitor‘s product for their own uses. It is common, for example, for smartphone manufacturers to buy the newest phones of their competitors and take them apart to see what new components and features the models have implemented. However, this sort of corporate behavior does not stop with hardware products. With hundreds of millions of users and rapid growth, China is considered to be one of the most lucrative online markets worldwide. Baidu (baidu.com), a Chinese web services company, has allegedly adapted many of the search tools that Google uses. Baidu, however, modifies its searches inside China (its major market) to accommodate government guidelines. In protest over these same guidelines, in 2010 Google left the Chinese market and has been running its Chinese search operations from Hong Kong. Google no longer censors its online searches as requested by the Chinese government.

In recent years Baidu has run into competition from another Chinese company (Bytedance) but Google is still not a key force in China. However, there are reports that Google is experimenting with censored searches in order to re-enter the burgeoning Chinese market. This has been controversial both inside and outside of the firm. One article from CNBC in summer of 2019 says, Google has been accused of working with China. Here‘s what they‘ve been doing there, Yet even inside the firm there are questions about the right approach to take with China as noted here in an article from The Intercept, Google‘s Secret China Project ―Effectively Ended‖ after Internal Confrontation.

1. It is legal to take apart publicly available products and services and try to replicate them and even develop work-arounds for relevant patents. But is it ethical? If a key capability protected by patents or trademarks in your firm is being reverse-engineered by the competition, what are your options for a response? Also, how do you evaluate Google‘s decision to move its servers to Hong Kong and forgo the Chinese market? After an absence of nearly a decade should the firm look for ways back into the search engine market in China?

It is legal to take apart publicly available products and services to replicate or produce similar products.

However, many students will find it isn‘t ethical. It is a common business practice across many developed and emerging countries around the globe. If this situation occurs, it is considered a patent violation also known as an infringement. If this occurs, the patentee can sue for relief in the designated federal court. However, in many markets by the time a case comes to court the business opportunity is already lost. Many firms take more of a ―continuous improvement‖ approach and press forward with new innovations and features in hopes of staying ―one step ahead‖ of the competition.

As for Google‘s position in China, this discussion will likely feature several different stakeholder groups. Google has a vested interest in entering a large, profitable market, but it must decide how it fits with their values. While entering this market possibly improves their financial performance (and making investors happy), there are those that will point to China‘s increasingly anti-Western stance as a reason to forego doing business here. Accused of human rights violations, doing business or being seen as a partner to China may damage the reputation of Google (an important intangible resource). Encourage students to examine the myriad of stakeholders and the repercussions of doing business in China for a rich discussion.

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Strategic Management, 6e Teacher‘s Resource Manual 2. The chapter mentions that one type of resource flow is the loss of key personnel who move to another firm. Assume that the human resources department of your firm has started running ads and billboards for open positions near the office of your top competitor. Your firm is also running Google ads on a keyword search for this same competitor. Is there anything unethical about this activity? Would your view change if this key competitor had just announced a major layoff?

Students will have a variety of viewpoints on this matter. As a matter of practice, the other firm can also run ads outside ―my firm‖ as well. Effective managers recognize many of their best employees will have headhunters call them with jobs at competitors, for example. The best counter to this situation is keeping an open dialogue with the associates at the firm so you know why they come to work every morning. If they are fairly satisfied with their current assignments and job situation, they will not answer the competitor ads, nor the headhunter phone calls. We find this does often change the student‘s perspective on the situation. Some of the most ardent in favor of an ethical violation in the first question now see it has a bridge to a fresh employment option for employees who did, or may be about to, lose their jobs.

TRM Extra: Small Group Activities 1) Brand valuations were mentioned in the chapter as a potential key intangible resource for firms. Some product brands are so well established that the entire category of products (including those made by competitors) may be called by the brand name rather than the product type. In your small group, develop two or three examples of this happening in the marketplace. In any of the cases noted, does such brand valuation give the leading brand a competitive advantage? Or does it produce confusion in the market for all products or services in that category? Provide advice to the leading brand as to how the firm can strengthen the brand name.

Students will have a variety of answers for this activity. Many classic retail products such as Band-Aid, Kleenex, ChapStick, and Coke will come up in the small groups. In addition, Google is commonly mentioned for all things search-related on the Internet. In the case of the classic retail products, you can bring out the discussion to ask ―if the brand Band-Aid got you to the drug store, but when you got there you bought the cheaper store brand adhesive strips… Did Johnson & Johnson, which owns Band-Aid, waste its marketing funds building up their brand?‖ The answer is dependent on how much traffic that awareness of the product brings to get consumers to the shelf, and what percent of those consumers, once in the store, go ahead and buy the brand that got them to the store shelf in the first place.

2) Strategy Highlight 4.2 explains the rise and fall of Groupon. The company‘s strategic vision was to be a global leader in local commerce, based on a core competency that could be described as ―local market-making.‖ Numerous competitors took advantage of low barriers to entry and the easy imitation of Groupon‘s combined competency of some technology skills with sales skills, so that Groupon found that its competitive advantage was only temporary. Groupon continues to compete but needs your advice on how to build dynamic capabilities that might help it pursue the vision of becoming a global leader in local commerce. How might Groupon reinvest or upgrade its technology and sales skills, so it builds a global customer base? For example, are there new products or services that 26 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual would meet the needs of global clients in each of the local markets where the client does business? Brainstorm ways that Groupon might add value for its customers. How might Groupon build relationships with clients that are more socially complex, making Groupon‘s competencies more difficult to imitate?

After the students have generated ideas in their group, you may want to update them on the strategic actions that Groupon has taken and ask them to compare Groupon‘s revised strategies to their proposals.

Related MiniCase Instructors may want to consider assigning and discussing the following MiniCase, which covers topics found in this chapter. Every MiniCase has assignable McGraw Hill Connect case questions available.

MiniCase 4: Dr. Dre‘s Core Competency: Coolness Factor

CHAPTER 5

Shared Value and Competitive Advantage Teacher Resource Chapter Contents

Teacher’s Resource Manual (TRM): Implementation Guide

ii

Learning Objectives

1

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Strategic Management, 6e Teacher‘s Resource Manual Textbook Chapter Contents

2

Chapter Teaching Resources

3

Overview of Chapter

5

Classroom Outline

6

Strategy Highlights

16

myStrategy

17

Discussion Questions

18

TRM Extra: Social/Ethical Questions

19

TRM Extra: Small Group Activities

20

Related MiniCase

22

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Strategic Management, 6e Teacher‘s Resource Manual

Teacher’s Resource Manual: Implementation Guide This Teacher‘s Resource Manual (TRM), supports delivery of your chosen curriculum and pedagogy.

This manual contains more than just guidance on how to cover concepts discussed in the sixth edition of Strategic Management; it also provides tips and best practices for how to utilize the full product suite (from the textbook to SmartBook® to Connect®). In addition, this manual includes a variety of supplemental teaching resources to enhance your ability to create an engaging learning experience for your students. Regardless of whether you teach in face-to-face traditional classrooms, blended (flipped) classrooms, online environments, or hybrid formats, you‘ll find everything you need in this improved resource.

The TRM follows the order of the textbook outline for each chapter and is divided into sections for each learning objective. Each section identifies the relevant PowerPoint slides from both the Lecture slides and the Supplemental Lecture slides (more on this below). This eases your preparation time for class as you can adjust slides as needed to ensure your students stay actively engaged throughout each session.

WHAT INSTRUCTOR RESOURCES ARE AVAILABLE? Within each section of the TRM you will find an assortment of examples, exercises, Connect® assignments, updates on the latest research, Strategy Smart Video discussions, and discussion questions and exercises from which you can choose to enhance your students‘ learning and engagement.

Within the Connect® Library, you will find the following: In the Test Builder tab, you can create tests from the Test Bank that can be printed or administered within your LMS. In the Instructor Resources, you can access all of the following items:         

Teacher‘s Resource Manual PowerPoints (Accessible) Application-Based Activities‘ accompanying Teaching Notes Create™ Case Support MiniCase Support Sample Syllabi Video Library Capsim‘s Capstone Simulation and Capsim IM Image Bank (for your customized PowerPoints)

29) This Teacher‘s Resource Manual is posted by chapter.

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Strategic Management, 6e Teacher‘s Resource Manual 30) Two sets of ADA-accessible PowerPoints are available with each chapter: a. Lecture slides cover chapter concepts and exhibits. b. Supplemental Lecture slides cover: i. ii. iii. iv.

Chapter Cases Strategy Highlights Implications for Strategic Leaders Strategy Smart Video selections (not part of the book, but an additional resource found here) v. Key Terms

31) Test Bank questions, found in the Library tab entitled Test Builder, are posted by chapter. You will find a variety of question types within the test bank such as Matching, Ranking, Multiple Choice, Select-All-That-Apply, True/False, Short Answer, and Essays to test student mastery across Bloom‘s Taxonomy (i.e. Understand, Apply, and Analyze).

32) Create™ Case Support (all cases are available in Create™ and selected ones in HBP) a. A case matrix that identifies the industry sector covered by each case, as well as the primary and secondary chapter alignments b. One-page case abstract for quick overview of each case c. Case Teaching Notes for instructor use only d. Case Financials in Excel files for the exhibit data in the most popular cases e. Case Strategic Financial Analysis template f. Instructions on How to Download SEC Financial Data into Excel Spreadsheets 33) MiniCase Support (all MiniCases are located in Part Four of the book) a. MiniCase Teaching Notes comprising suggested answers to the MiniCase discussion questions. In some instances, they also provide specific additional article and video resources to accompany each MiniCase.

34) Video Resources, located in the Video Library, provide links to supplemental video resources to accompany both the MiniCases and full-length Create™ cases, as well as links to all of the assignable videos in Connect®.

35) A link to Capsim’s Capstone Simulation and a Capsim Instructor’s Manual correlated to Strategic Management is provided; this simulation allows students to apply their knowledge of key strategy concepts.

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Strategic Management, 6e Teacher‘s Resource Manual

HOW CAN SMARTBOOK® ENHANCE MY STUDENTS’ PERFORMANCE? SmartBook® is assignable through Connect®, McGraw Hill‘s online assignment and assessment system.

One of the first fully adaptive and individualized study tools designed for students, it creates a personalized learning experience, giving students the opportunity to practice and challenge their understanding of core strategy concepts. The reporting tools within SmartBook® show where students are struggling to understand specific concepts.

Typically, SmartBook® is assigned by module (chapter), and instructors can set which learning objectives to cover as well as the number of probes the student will see for each assignment. Instructors also set the number of points a SmartBook® module is worth in the course. Usually, applying a minimal number of points for completion of each module is enough to encourage students to read the chapter.

Many instructors assign these modules to be completed before the class or online session.

SmartBook® provides several diagnostic tools for instructors to gauge which concepts their students struggle to understand. Below is the set of adaptive assignment reports available in SmartBook®:      

Progress Overview: View student progress broken down by module.

Student Details: View student progress details plus completion level breakdown for each module.

Module Details: View information on how your class performed on each section of their assigned modules.

Practice Quiz: This gives you a quick overview of your students‘ quizzes results.

Missed Questions Metacognitive Skills

By selecting ―Module Details‖ the instructor finds the results for the students in the class overall. These details reveal where in the chapters students might be struggling. The module gives the chapter section, average time spent, average questions per student correct/total, and the percentage of correctness (number of assigned items). Information about the most challenging sections for students can help instructors refine the focus of the next classroom or online session.

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Strategic Management, 6e Teacher‘s Resource Manual For more detailed analysis, SmartBook® captures students‘ confidence in their competency using the ―Metacognitive Skills‖ report. Below (a recreation of the Metacognitive Skills report), we find the second student is confident and mostly correct (91% in the correct & aware column) while the first student ―doesn‘t know what they don‘t know‖ (39% in the far-right column).

STUDENT

Student 1 Student 2 Student 3 Student 4 Student 5 Student 6 Student 7 Student 8 Student 9 Student 10

CORRECT and AWARE 61% 91% 81% 83% 76% 66% 77% 91% 93% 70%

CORRECT and UNAWARE 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

INCORRECT INCORRECT and AWARE and UNAWARE 0% 39% 3% 5% 0% 19% 0% 17% 3% 21% 9% 25% 3% 20% 2% 7% 2% 5% 6% 25%

APPLICATION EXERCISES, QUIZZES, AND TEST BANK What resources are available at the book level?

Connect® offers a wealth of content for both students and instructors. Application Exercises require students to apply key concepts to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor. Before getting into chapter-level assignments, let‘s look at the book-level assignments available.

Four exercises are available for instructors to assign beyond the chapter materials. These are 1) MiniCase Case Analyses, 2) Case Exercises, 3) Financial Ratio Reviews, and 4) MyStrategy exercises.

The Financial Ratio Reviews and MyStrategy exercises comprise our new Student Primer in Connect.

17) To encourage analytical thinking, each MiniCase from Part Four of the book is also an assignable application exercise (MiniCase Case Analysis). Each MiniCase is followed by four to five multiple-choice questions that assess students‘ understanding of the key issues presented in the MiniCase.

18) Case Exercises focus on the key symptoms and influences of a problem a firm might be facing, followed by a series of questions that help students understand how the firm eventually achieves a solution to that problem (or asks students to suggest a solution).

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Strategic Management, 6e Teacher‘s Resource Manual 19) Financial Ratio Reviews give students the opportunity to further hone their financial analysis skills; review exercises cover each type of financial ratio (activity, leverage, liquidity, market and profitability).

20) MyStrategy exercises for each chapter provide direct personal applications of strategy concepts to careers and lives to help students internalize the content.

What resources are available for each chapter and how should I integrate them in my course?

Consider assigning one or two Application Exercises per chapter. They are built around chapter learning objectives, so the instructor can choose based on their focus for each specific chapter. Several types of application exercises are available in each chapter. The newest additions are our Animated Videos, comprising three- to four-minute videos on key concepts or concepts that tend to challenge students the most. Each animation is accompanied by three to four multiple-choice questions to check student attention and comprehension. Comprehensive Case Analyses and our new On-Location Video Cases feature firms and industries different than those discussed in the textbook and provide relevant, topical information for students. Finally, Click-and-Drag exercises help students actively demonstrate their understanding of the associated learning objectives. Application Exercises can be assigned as preparatory exercises due before class (this is especially good for flipped classrooms), or after class as concept comprehension checks. Applications Exercises will generally be assigned as homework or practice as part of the overall class grade. A general rule of thumb would be to make application exercises worth 5 to 10 points each since these require time and thought.

To find the Applications in Connect®, go to ―Add Assignment‖ and then select ―Question Bank.‖ Application Exercises are organized by chapter. Instructors have the option to select for one attempt only, but they may want to give students unlimited or multiple attempts on the first few assignments to give students a chance to learn and navigate the system. (As the course progresses, instructors may want to tighten up the time on task and reduce the number of attempts to complete each exercise).

Chapter quizzes and full chapter test banks are available for assignment, and like the Application Exercises, are organized by chapter. The value applied to each question should be relatively low because numerous questions are usually assigned for each chapter. As such, make these questions worth 1 or 2 points each. The feedback given to students is time-flexible. Selecting feedback to be displayed after the assignment due date helps to keep students from giving the correct answers to other students while the questions are still available. For this reason, it is suggested that no feedback to quizzes and test bank exams be made available until after the assignment is due.

When should I assign these digital components?

To fully utilize the power of the digital components, instructors will often assign the SmartBook® reading and adaptive learning probes before class meets. Application Exercises can be completed either before or after class; if they are completed before class, they can sometimes serve as good springboards for class discussions. The chapter quiz makes a good check on comprehension of the material and may work best if assigned after each class period. The test bank serves as a good resource for building midterm or final exams.

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Strategic Management, 6e Teacher‘s Resource Manual More detailed information on SmartBook® and Connect® is available through several resources at McGraw Hill. A good starting point is your local Learning Technology Representative, who can be found here: http://www.mheducation.com/highered/platforms/connect/features-educators.html

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Strategic Management, 6e Teacher‘s Resource Manual

COURSE PREPARATION Helpful Suggestions Regarding Assignment Policies: Connect® gives instructors a wide array of flexibility in making assignments and creating grading policies. Instructors may choose to: 

assign as many assignments as appropriate given the level and time commitment expected for the class,



determine point values for each question/application that works within the total course percentages,



make available multiple attempts per assignment with options of accepting the highest score or averaging all the attempts together (several attempts are particularly good for homework assignments),



deduct points for late assignment submissions (percentage deduction per hour/day/week/etc.) or create hard deadlines thus accepting no late submissions,



show feedback on application/questions immediately upon submission or at the time the assignment is due for the whole class, create new assignments or questions from scratch, or edited versions from a variety of provided resources.

Throughout the TRM for each chapter, we will integrate materials from the Lecture PowerPoint slides, Supplemental Lecture slides, Connect® Application Exercises, and MiniCases. This integration of resources will allow for a cohesive presentation of the relevant resources at your disposal, helping you to convey these topics effectively and efficiently to your students.

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CHAPTER 5 Learning Objectives 5-1

Compare and contrast shareholder capitalism and stakeholder capitalism while highlight the strengths and weakness of each.

5-2

Explain the shift in emphasis from corporate social responsibility (CSR) to create shared value (CSV).

5-3

Appraise accounting metrics and shareholder value creation as measures of competitive advantage.

5-4

Link economic value creation to different sources of competitive advantage.

5-5

Apply a balanced scorecard to assess and evaluate competitive advantage.

5-6

Apply a triple bottom line to assess and evaluate competitive advantage.

In this chapter, we take an analytical look at the defining goal of strategic management, gaining and sustaining competitive advantage. To explain differences in competitive advantage, we must think hard about how to best measure it. We start by introducing three standard dimensions used to study firm performance: (1) accounting, (2) shareholder value, and (3) economic value creation. We apply them to competitive advantage and compare and contrast when it may be best to use each type of measure. We then discuss two more holistic frameworks: (1) balanced scorecard and (2) triple bottom line. We introduce a diverse set of measures to capture the multifaceted nature of competitive advantage (refer students to Exhibit 5.11). We then show how firms use business models to translate strategy into action.

A chapter opening case examines the pioneering benefit corporation Patagonia, and two strategy highlights are included in the chapter for tangible applications of the theoretical frameworks discussed.

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Strategic Management, 6e Teacher‘s Resource Manual

Text Chapter Contents ChapterCase 5: Patagonia: A Pioneer in Creating Shared Value 5.1 From Corporate Social Responsibility to Creating Shared Value (LO 5-1, LO 5-2) CONNECT® INTEGRATION Matching/Multiple Choice: Economic Value Creation Strategy Highlight 5.1: BlackRock’s $10 Trillion of Shared Value 5.2 Competitive Advantage (LO 5-3, LO 5-4, LO 5-5, LO 5-6) Strategy Highlight 5.2: PepsiCo’s Indra Nooyi: Performance with Purpose CONNECT® INTEGRATION Whiteboard Video: The Drivers of Profitability CONNECT® INTEGRATION Whiteboard Video: Economic Value Creation CONNECT® INTEGRATION Multiple Choice: Economic Value Creation and Balanced Score Card CONNECT® INTEGRATION Matching: PepsiCo’s Indra Nooyi: Performance with a Purpose 5.3 Implications for Strategic Leaders ChapterCase 5 / Part II CONNECT® INTEGRATION Comprehension Case: Patagonia: A Pioneer in Creating Shared Value

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Chapter Teaching Resources SECTION

Title

RESOURCE TYPE

CHAPTERCASE 5

Patagonia: A Pioneer in Creating Shared Value Demand Organic Cotton

Web Video (0:30 secs)

Patagonia Founder to Shoppers: Don‘t Buy Clothes You Don‘t Need (Even Mine)

Today Article + Video (3:43 mins)

5.1: From Corporate Social Responsibility to Creating Shared Value

5.2: Competitive Advantage

Economic Value Creation

Connect® Matching/Multiple Choice

Ethical/ Social Issues: Online vs Brick & Mortar retailing

TRM Extra

Ethical/ Social Issues: Unintended consequences of goal setting

TRM Extra

Small Group Exercise: School Balanced Scorecard

TRM Extra

Small Group Exercise: Triple Bottom Line talking points

TRM Extra

MiniCase 5: Sustaining Shared Value: The Rise and Fall of Toms Shoes

Rothaermel Textbook

Gang of Four: Apple/Amazon/Facebook/Google DLD16

Web Video (16:18 mins)

From Apple to Microsoft, Big Tech Results Spotlight Breadth of Economic Upheavalv PepsiCo‘s Indra Nooyi: Performance with a Purpose

WSJ article

Connect® Matching

5.3: Implications for Strategic Leaders Patagonia: A Pioneer in Creating Shared Value

Connect® Comprehension Case

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Strategic Management, 6e Teacher‘s Resource Manual

Overview of the Chapter 5.1

From Corporate Social Responsibility to Creating Shared Value The way we discuss firm performance has evolved over time. This introductory section compares and contrasts the concepts of shareholder capitalism and stakeholder capitalism. There has been a shift from CSR to CSV in the last two decades. A major reason for this shift is due to the myriad crises that have plagued shareholder capitalism. Stakeholder capitalism has emerged as a management approach that considers and benefits a multitude of stakeholders (including shareholders, employees, customers, and the communities in which these firms operate) instead of a focus on just the shareholders. What makes CSV so difficult is that the interests of various stakeholders often stand in conflict. CSV is often confused for CSR. While CSR is externally focused to address pressure that arise externally, CSV is internally focused and derives from a deeper purpose.

5.2

Competitive Advantage To measure and understand competitive advantage requires the ability to accurately assess firm performance and compare and benchmark the firm‘s performance to other competitors. While there are several simple metrics that can be used to compare the performance of firms, it is necessary to develop a multidimensional perspective to access competitive advantage. Three areas of investigation are: accounting profitability, shareholder value, and economic value.

Accounting profitability uses standard metrics derived from publicly available accounting data.

Exhibit 5.3 illustrates how the importance of book value has varied over time, representing 80% of market value in 1980 before dropping to 15% during the dot-com bubble of 2000. As with accounting profitability, shareholder can be examined with various metrics. The relationship between economic value creation and competitive advantage is fundamental in strategic management. Exhibit 5.8 explores this relationship and the roles of value, cost, price, and profit.

Each method of evaluating a firm‘s performance has limitations. There is no one number that holds all the answers. These three performance measures are generally correlated, especially over time.

Managers can also apply a balanced scorecard or a triple bottom line analysis to assess and evaluate competitive advantage. Each of these methods strives to provide a more holistic evaluation of a firm‘s performance (beyond an internal financial accounting focus) and its relationship to competitive advantage.

5.3

Implications for Strategic Leaders Exhibit 5.11 summarizes methods used to measure and assess competitive advantage. Other key leanings include: No best strategy exists; strategic management is to integrate and align function and activities to obtain superior performance is critical in achieving competitive advantage.

ChapterCase 5/Part II investigates the actions and purpose-driven mission of founder Yvon Chouinard and current CEO Ryan Gellert.

4

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Classroom Outline ChapterCase 5 Patagonia: A Pioneer in Creating Shared Value The opening ChapterCase discusses the history of Patagonia and the philosophy of its very unique founder, Yvon Chouinard. While in recent years, it has become fashionable for executives to extol their companies‘ environmental, social, and governance credentials, Patagonia is a company that has pioneered and led the business world in pursuing a stakeholder strategy. This case takes a look at how the leadership and values of Yvon Chouinard have shaped Patagonia and how it has built success in a very different way than other firms.

INSTRUCTOR SUPPLEMENT SLIDE 3

STRATEGY SMART VIDEO EXAMPLE INSTRUCTOR SUPPLEMENT SLIDE 18 This link takes you to a 30-second video on Patagonia‘s YouTube channel that discusses the organic cotton used to craft their clothing. There are many other videos on Patagonia‘s YouTube channel that describes their merchandise, activism, and values. If you like the short video, you may want to explore additional videos to get students familiar with the brand and their mission.

This link takes you to a Today show interview with founder Yvon Chouinard. Students will get to hear his unique philosophy on consumerism and put a face/voice to the man they will read a lot about.

ChapterCase 5 Part II The closing ChapterCase provides more information focusing on the many different activities Patagonia is currently involved in. Patagonia Works currently oversees ventures in apparel, food, media, and other investments. Ryan Gellert, Patagonia‘s current CEO is continuing with its purpose-driven mission to use business to combat climate change, and he is sounding a call for other companies to engage in activism.

ChapterCase 5 Discussion Questions 1.

Strong founder imprinting, like that at Patagonia, can result in cohesive groups of employees holding similar beliefs. As a result, the corporate culture becomes more potent and unique. Yet, strong cultures can have a negative side effect: groupthink, the situation in which opinions coalesce around a leader and individuals do not critically evaluate and 6

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Strategic Management, 6e Teacher‘s Resource Manual challenge that leader‘s views and assumptions. Cohesive, non-diverse groups are highly susceptible to groupthink, which can lead to poor decision making with potentially harmful consequences. Is groupthink a risk to Patagonia? Why or why not?

Students should be familiar with the concept of groupthink, and it will be interesting to see what their responses will be to this question. Patagonia‘s YouTube channel showcases a progressive mindset and policies, and one of their values is ―Not bound by convention.‖ One could argue that Patagonia has already broken the mold when it comes to how successful businesses should run and therefore would be a lesser risk for groupthink. On the other hand, a single-handed focus on saving the environment may lead to myopia when it comes to other important issues. Hiring employees that fit in with Patagonia may leave out other important voices/perspectives. It may be a good activity to encourage students to not only take a stance but do in-class research to find evidence to support their positions. You may also want to assign students to a particular position to defend.

2. Yvon Chouinard has had a tremendous influence on Patagonia over decades, initially by setting its strategy and culture. Chouinard was born in 1938. Many companies such as Walmart, Microsoft, Apple, and Dell experience great difficulty after their iconic founders departed. Do you think Patagonia may face a similar crisis when Chouinard is no longer involved with Patagonia? Why or why not? Explain.

This is a good opportunity to connect Chapters 1, 2 and 5 in students‘ minds. Chouinard is a pioneering leader, and much of Patagonia‘s identity is inextricably linked to him. However, given how important values are to Patagonia plus their unwavering commitment to do business differently, one could argue that it takes certain kinds of employees and leadership to be successful at Patagonia. You may want to have students understand what went wrong at companies like Walmart, Microsoft, Apple, and Dell after their founders departed and compare them to the current status of Patagonia. Are there any similarities?

Are there any differences? Other areas that warrant attention would be Chouinard‘s philosophy of given employees‘ autonomy. Given that employees are empowered to act independently, there may be less trauma when Chouinard is no longer with the company.

3. Strategy is as much deciding what to do as it is about choosing what not to do. Chouinard decided to keep Patagonia private. Being a private company limits growth (as mentioned, Nike is some 50 times larger than Patagonia). Should Patagonia go public to maximize the impact of its mission ―to save our planet‖? In other words, could a larger Patagonia make a more significant difference in achieving its purpose-driven mission? Would a publicly traded Patagonia company allow more people to buy into and support the company‘s vision by purchasing the company‘s shares? What are the pros and cons of Patagonia going public? Which would you support—remaining private or going public? Explain.

Students will likely have varied responses to this question. The fact that Patagonia is not beholden to shareholders has allowed it to operate differently from other firms. Its values are so tightly intertwined with the firm‘s strategy that going public may jeopardize the very thing that makes Patagonia different form other firms. While a larger firm may possibly have more power, things for Patagonia to consider would be the increased amount of managerial attention that are required as firms grow larger. Larger 7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual firms are more complex. This creates more distance between the upper echelons of the firm and other employees. These firms are more difficult to manage, and the Etch-a-Sketch method of communicating with the CEO may no longer be effective. Additionally, growth may not be sustainable for a company whose value chain looks very different from other apparel manufacturers. Finding suppliers of organic cotton, sustainable and recycled material, and other eco-friendly supplies may not be scalable as Patagonia grows larger. While they have potential to have more impact on the environment and society, there is likely a trade-off. Patagonia as a large retailer could influence regulations and other legislation, and they could set industry standards. That has the potential to help the environment and do more for society. Encourage students to think deeply. It may be fun to assign a devil‘s advocate or push students to think deeply about the benefits and drawbacks of size.

4. On a more philosophical note, do you think businesses should pursue ESG goals such as combating climate change? Or should companies attempt to be as efficient as possible in providing products and services, focus on their core business, and return profits to owners who then can pursue ESG goals independently? One criticism levied against ESG activism is that many of the problems that companies attempt to solve should be left in the public domain and addressed through the political process because they concern social and environmental policy issues. Critics argue that companies do not have a legitimate democratic mandate and that capitalism may show up in areas of social and public life where it has not place. Other criticisms focus on the fact that businesses are not efficient in solving problems outside their expertise and that many companies pursue ―greenwashing‖ as a public relations technique. What do you think? Explain.

Students will have a wide range of responses to this question. It may be useful for the purpose of discussion to have a few current events at hand to see which problems are out there or to see which issues firms are trying to solve. You may also want to guide discussion to show how firms that pursue certain ESG initiatives are not qualified or able to effectively respond to the challenges. For example, firms pursuing AI (facial recognition technology, medical diagnostics) as solutions to problems don‘t include diverse employee bases. As a result, issues or problems aren‘t solved. Climate change is also another good topic to pursue. As automakers continue to produce and develop electronic vehicles, are they creating new problems (destructive lithium mining, waste from exhausted batteries, etc.).

5.1 FROM CORPORATE SOCIAL RESPONSIBILITY TO CREATING SHARED VALUE LO 5-1 Compare and contrast shareholder capitalism and stakeholder capitalism while highlight the strengths and weakness of each.

LO 5-2 Explain the shift in emphasis from corporate social responsibility (CSR) to creating shared value (CSV).

LECTURE SLIDES 3–11 CLASS EXERCISE 8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual Have students select a firm and research the firms environmental, social, and governance criteria. Some variations of the exercise can be dividing students into groups to research multiple firms in the same industry (e.g., Johnson & Johnson, Pfizer, Merck, Bayer, etc.). It would be interesting to compare and contrast the ESG goals stated in their corporate documentation and websites. For example, do firms in an industry have ESG goals in common? Are any of the firms pursuing different goals? Which firms appear to be actively pursuing these goals vs. which are merely lip service?

Another variation that explores the shift from CSR to CSV would be to look at how company‘s ESG goals have changed over time. Compare and contrasting may help students grasp the importance of ESG and also look at real examples of how firms include these as part of their strategy.

INTEGRATION Matching/Multiple Choice: Economic Value Creation This exercise starts with a brief case using pizza costs and pricing as an additional example of economic value. This complements the book‘s discussion about laptop computers. The student must read the textbook and also the case provided here. Then, the student will apply some simple math to check understanding of the correct economic concepts and drag the elements to the correct locations. Finally, the student will answer three related questions to complete the activity. 

Difficulty: Medium

 Blooms: Apply

5.2 COMPETITIVE ADVANTAGE LO 5-3 Appraise accounting metrics and shareholder value creation as measures of competitive advantage.

LECTURE SLIDES 12–14

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for information on an extended discussion online versus brick and mortar stores and the implications of this competition.

EXAMPLES We find that students are most comfortable with this perspective of measuring competitive advantage.

Whether they have invested their own money or not, they are largely familiar with buying and selling publicly traded stocks. We try to point out the highly volatile and short-term nature of stock prices, 9 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual whereas generally we think about competitive advantage lasting more than one quarter or one year.

Coverage of the drawbacks of this perspective is useful to help students understand when this approach may be appropriate and when it may NOT be.

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Strategic Management, 6e Teacher‘s Resource Manual DISCUSSION TOPICS The video ―We‘re all predictably irrational‖ is 20 minutes of a speech by Professor Dan Ariely, the author of The New York Times bestseller Predictably Irrational and also several books like The Upside of Irrationality and Irrationally Yours. The video is too long for most class presentations, but we ask for student volunteers to view the video before class and let them select a two- or three-minute section to show to the class. Alternatively, each student could be assigned to view different brief videos on Professor Ariely‘s website, danariely.com, (most are less than one minute) and summarize for the class in one sentence the learning message from that video and how it might affect the purchase of stocks.

Professor Ariely‘s work focuses on behavioral economics and explains why people are not rational but yet their decisions can still be inferred.

LO 5-4 Link economic value creation to different sources of competitive advantage.

LECTURE SLIDES 15 –16 STRATEGY SMART VIDEO INSTRUCTOR SUPPLEMENT SLIDE 17 Students seem to find consumer and producer surpluses confusing. The short video may help to reinforce the written description in the textbook and could be assigned for viewing before your lecture.

EXAMPLES The PC example in the text should resonate well with students, since it represents a significant purchase for them in which they likely consider competing brands with different positioning. We use some of the class time to highlight the differences between consumer surplus and producer surplus. Also, in a foreshadowing of Chapter 6 (business-level strategies), we note firms have the ability to adjust the price within the economic value created space (V-C). In discussing economic value creation, we sometimes refer to these as the ―VPCs‖ to highlight the key components in a way to help students remember the material. In class we also note some drawbacks of this approach.

Supporting data for the Apple Watch example for the cost versus sales price is provided in an interesting WSJ article ―What Makes the Apple Watch Tick‖.

For a more everyday example, let‘s assume you are hungry and you value (V) a pizza at $12. You thus are willing to pay a price (P) of $10 for the pizza that your local bistro offers, even though you realize it probably costs less than $10 to produce it. Suppose the bistro‘s total cost (C) is in fact $7. The difference between value (V = $12) and cost (C = $7) is the economic value created by the entrepreneur who runs the bistro, in this case, V – C = $12 – $7, or $5. The economic value created is sometimes also called the economic contribution. The difference between the price charged (P), and the cost to produce (C), is the entrepreneur‘s profit or (in economics) producer surplus. In our example, the profit is P – C = $10 – $7 = $3. The entrepreneur captures this amount as profit. As the consumer, you capture the difference between what you would have been willing to pay (V) and what you paid (P) as something called consumer surplus. In our example, the consumer surplus is V – P = $12 – $10, or $2. This relationship is illustrated in the chapter in Exhibit 5.7 11 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual Total costs include both fixed and variable costs. Fixed costs are independent of consumer demand— e.g., the cost of capital to rent the bistro space and buy the pizza oven and other equipment. Variable costs change with the level of consumer demand—e.g., flour, tomato sauce, cheese, and other pizza ingredients as well as labor and utilities. Because the cost of capital and the cost of the bistro are fixed, the bistro becomes more profitable as the bistro entrepreneur sells more pizzas and thus spreads her fixed costs over a larger sales volume. This example can provide greater context to the discussion of opportunity costs in the textbook.

INTEGRATION Whiteboard Video: Economic Value Creation This animated video case analysis provides an overview of perceived value as an aspect of economic value. The video discusses a bakery selling goods and the differential value that customers can have for products such as cherry pie. 

Difficulty: Medium

 Blooms: Apply LO 5-5 Apply a balanced scorecard to assess and evaluate competitive advantage.

LECTURE SLIDES 17–21 STRATEGY SMART VIDEO INSTRUCTOR SUPPLEMENT SLIDE 14 This HBR video explains how the balanced scorecard can be used as a tool to communicate strategy throughout the firm.

EXERCISE Balanced-scorecard methods may have some advantages for firms when they are trying to assess the sustainability of their competitive advantage over the long term, rather than the snapshot in time offered by three methods previously discussed. ―Measuring Long-Term Performance‖ in McKinsey Quarterly, is a classic article discussing how firms might use a selection of multiple measures of performance to give a better insight into competitive advantage in the medium to long term. Examples of measures they suggest are sales growth, ability to control cost structure relative to competitors over the past five years, strength of new product pipeline, asset maintenance, and financial flexibility. Divide the students into teams and tell them that they have just been appointed as consultants to the CEO of Microsoft. Develop a balanced scorecard of areas they should focus on to ensure that the company would have an improved competitive advantage versus Apple by 2030.

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TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for information on a case about the unintended consequences of setting and measuring goals in a manufacturing setting.

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity for team to create a balanced scorecard for your business school.

LO 5-6 Apply a triple bottom line to assess and evaluate competitive advantage.

LECTURE SLIDES 22–23 EXAMPLES The second integrative framework is the triple bottom line. This approach does not have the widespread appeal of the balanced scorecard, but there are signs that organizations are increasingly asked to address these ―triple concerns.‖ Students will often have strong views for or against a triple-bottom-line approach. Some will think the firm should stick to the financials, while others will want the firms to push for more progress in the social and ecological areas.

Refer students to the Corporate Responsibility section of Chevron‘s website. It offers a thorough example of a triple-bottom-line approach, including community and environment, as well as related internal factors, such as workforce health and safety and ethical behavior. You might want to open a discussion on the effectiveness of annual reporting on Corporate Responsibility.

Resource-dependent industries have long used a triple-bottom-line approach to competitive advantage.

Their businesses have major impacts on the environment, whether through mining or drilling. Moreover, access to these resources is normally granted at the will of the local or national government. As a result, demonstrating commitments to society is usually an important factor in determining which of the rivals in the industry will be given access to any particular source of resources. In the context of Exhibit 5.9, the overlapping space between these three circles is much larger for resource-based industries than for many other industries.

STRATEGY SMART VIDEO INSTRUCTOR SUPPLEMENT SLIDE 15 13 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual Dr. Karl-Henrik Robèrt talks about the triple bottom line in a nonprofit organization in this 2 ½ minute video.

Strategy Highlight 5.1 BlackRock’s $10 Trillion of Shared Value Click here for a summary of the Strategy Highlight covering how the CEO of BlackRock wields his firm‘s power to pursue ESG goals.

DISCUSSION TOPIC Firms are increasingly creating and pursuing ESG-focused goals. Companies like BlackRock (and their leaders) wield enormous influence and power, and they can put pressure both on firms to alter their strategic focus (e.g., BlackRock‘s pressure on Exxon). While Larry Fink indicates that pursuing these goals and paying attention to external and internal stakeholders is crucial to long-term success, others have deemed that these leaders have overstepped their boundaries. Ask students to take a side on this issue. Is it the responsibility of firms to engage in sustainability, activism, etc.? This may be another great tie-in to the ChapterCase about Patagonia. Patagonia is an excellent example of a firm that lives its values. Ask students how to measure success of ESG goals. Are there any issues or problems that they foresee?

INTEGRATION Multiple Choice: Economic Value Creation and Balanced Score Card This exercise will help students to understand the multiple internal and external performance metrics that can be used to create value and balance strategic and financial goals. 

Difficulty: Medium

 Blooms: Apply

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TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity around formulating talking points supportive of a triplebottom line approach to business.

Strategy Highlight 5.2 PepsiCo’s Indra Nooyi: Performance with Purpose Click here for a summary of the Strategy Highlight covering how the CEO of PepsiCo brought aspects of the triple bottom line into the firm.

INSTRUCTOR SUPPLEMENT SLIDES 5: PEPSICO’S INDRA NOOYI: PERFORMANCE WITH PURPOSE DISCUSSION TOPIC Consumer products with high plastic content are also focus points for a triple-bottom-line strategy. Lego is recruiting 100 researchers to redesign its bricks for the first time since 1963 in response to consumer preferences for products that are produced more sustainably. In 2014, Lego used 77,000 metric tons of petroleum in producing its bricks as discussed in this WSJ article, ―Lego Tries to Build a Better Brick.‖ Lego also experimented with a recycling program for old bricks in the United States in 2019 as covered in this Washington Post article, ―Lego tries out recycling programs for its plastic bricks.‖ Ask students to identify other firms that might benefit from taking the same actions as Lego.

Ask students to share how a firm‘s sustainability practices influence their behaviors as consumers. In other words, based on a sample size of one, how closely overlapped are environmental sustainability, societal impacts, and profits in fast-moving consumer goods industries? In deciding whether to buy Coke beverages or Pepsi beverages at the grocery store, how much do you consider the amount of recycled materials used in the packaging for each firm or the extent to which the firm donates money to social causes? If you have a Starbucks on campus, did any students begin buying more coffee there when the firm switched to recyclable cups or sustainably grown coffee beans?

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Strategic Management, 6e Teacher‘s Resource Manual

INTEGRATION Matching: PepsiCo‘s Indra Nooyi—Performance with a Purpose With three short essay questions, this activity is important for demonstrating how corporate social responsibility can and does contribute to not only financial rewards for the company, but rewards for society and the environment as well. 

Difficulty: Medium

 Blooms: Understand

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity around formulating talking points supportive of a triplebottom line approach to business.

5.3 IMPLICATIONS FOR STRATEGIC LEADERS INSTRUCTOR SUPPLEMENT SLIDE 11 EXERCISE Here is an exercise in critical reasoning skills that focuses particularly on the student‘s skills in triangulation, sense-making, evaluative judgments, and logical argument. Ask the student to choose a publicly traded firm. If they are doing the Strategic Management Term Project, then that firm would be the ideal choice. Otherwise, they could choose a firm for which they might like to work or that they are researching for another class. Then ask them to watch the firm‘s most recent earnings presentation or other presentation to Wall Street analysts and read an article in the business press on the earnings results published after the presentation. Next, ask them to write a brief paper addressing these questions: What was one area that one or more analysts seemed most concerned about? In what way did his/her view differ from that of the company? Why do you think that was? How did the company portray its performance in this area? What did it identify as logical arguments and evidence to support its view of performance or future prospects? What was the perspective of the business press reporter? Were they more or less positive than the company? Why? After reviewing all three different perspectives how would you evaluate the firm‘s performance? Which evidence did you find most persuasive in reaching this conclusion? Why?

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Strategic Management, 6e Teacher‘s Resource Manual

INTEGRATION Comprehension Case: ChapterCase—Patagonia: A Pioneer in Creating Shared Value Here, we provide both Parts 1 and 2 of this case, accompanied by short-answer questions that students can complete and submit. Due to the nature of these open-ended questions, they require manual grading. 

Difficulty: Medium  Blooms: Apply

Strategy Highlights Strategy Highlight 5.1 BlackRock’s $10 Trillion of Shared Value INSTRUCTOR SUPPLEMENT SLIDE 5 This highlight discusses Larry Fink, CEO of BlackRock, Inc. As the world‘s largest investment management corporation, BlackRock yields a significant amount of power and influence. Fink is pushing firms that his company includes in their portfolios to embrace ESG issues. While some applaud his and BlackRock‘s shift to a multiple stakeholder approach, others have pointed out that ESG issues out to be worked out via political processes (instead of one powerful firm).

Strategy Highlight 5.2 PepsiCo’s Indra Nooyi: Performance with Purpose This highlight discusses Indra Nooyi‘s tenure as CEO of PepsiCO. Nooyi was a 12-year veteran of Pepsi prior to being named CEO in 2006. Early in her executive position, she declared a vision defining Performance with Purpose. The three components of this vision are: Human Sustainability, Environmental Sustainability, and The Whole Person at Work. This triple bottom line has resulted in increased focus on issues such as pollution and the need to fight obesity. While PepsiCo‘s revenues have remained basically flat, from 2013 to 2018, PepsiCo enjoyed normalized stock appreciation at 66 percent while Coca-Cola recorded appreciation of only 25 percent.

my Strategy 17 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual Here, we encourage the student to take what they have learned about competitive advantage and apply it to his/her own career. Encourage students to spend a few minutes looking at themselves to discover their own competitive advantages.

1. The myStrategy box at the end of Chapter 2 asked how much you would be willing to pay for the job you want—for a job that reflects your values. Here, we look at a different issue relating to worth: How much is an MBA worth over the course of your career? Alongside the traditional two-year full-time MBA program, many business schools also offer evening MBAs, online MBAs, and executive MBAs. Let‘s assume you know you want to pursue an advanced degree, and you need to decide which program format is better for you (or you want to evaluate the choice you already made). You‘ve narrowed your options to either (1) a two-year full-time MBA program, or (2) an executive MBA program at the same institution that is 18 months long with classes every other weekend. Let‘s also assume the price for tuition, books, and fees is $50,000 for the full-time program and $120,000 for the executive MBA program.

Which MBA program should you choose? Consider in your analysis the value, price, and cost concepts discussed in this chapter. Pay special attention to opportunity costs attached to different MBA program options.

It‘s a no-brainer, right? You go for the full-time MBA program, because it‘s cheaper by $70,000. Think again…

The concepts of economic value (V), price (P), and cost (C) can help you to make a much more informed decision. Let‘s begin with C, in this case the total an MBA program would cost you, not just the sticker price. C also includes your opportunity cost, which captures the cost of the second-best alternative you forgo based on your decision to get an MBA. Assume you are currently employed, and your annual salary is $50,000. Quitting your job to go to a full-time MBA program means forgoing two years‘ salary, or $100,000 in opportunity cost (assuming the day program is 24 months long). Add this to the program‘s price (P) of $50,000, and your total cost for the full-time MBA option is $150,000.

Let‘s compare that to the executive MBA option. Its tuition is $120,000, and you don‘t have to leave your job, so you are making another $75,000 during the 18 months you go to school every other weekend. The net cost of the executive MBA program is suddenly down to $45,000 versus $150,000 for the day program. Now the executive option looks much more attractive, by $105,000. Business school administrators know this too, which is one reason executive MBA programs cost much more than fullday programs.

Based on total cost considerations alone, it would be better to choose the executive MBA option, assuming you value it more than $45,000. This seems to be an easy hurdle to cross, because salaries frequently double after completing an MBA. If your salary was to double from $50,000 to $100,000, it would take you less than two years to break even (in regard to total out-of-pocket outlays).

You would choose the day MBA option over the executive MBA program only if you valued the differences in the day program by more than $105,000. These differences include more in-class time, two years to concentrate on your studies, and time spent networking with fellow MBA students. Given the significant opportunity costs for students to attend two-year full-time MBA programs, top students 18 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual receive scholarships and thus are incentivized to attend day programs. Attracting top students to dayMBA programs in turn helps these business schools to rise in annual rankings published by U.S. News and World Report and BusinessWeek. The reputation benefits of a highly ranked day MBA program spill over to the executive MBA programs, attracting more paying customers.

So, the valuation of the MBA program is up to you—the schools you have in mind, your personal circumstances (employment opportunities, scholarships, and so on), and how you value two more years of school versus two additional years in the job market. The answer truly is your strategy.

Discussion Questions 7. The chapter begins with a discussion of shareholder capitalism to the stakeholder capitalism. Why have we seen this shift in perspective in business? Has the rate of change been steady or are we seeing acceleration towards this new philosophy? Why? What are the benefits and drawbacks of pursuing stakeholder capitalism?

Students will have a variety of responses—greater attention to activism, awareness of issues through social media, and a changing attitude of society as a whole have contributed to this shift. Black Swan events like the COVID-19 pandemic (leading to the Great Resignation), the Black Lives Matter movement (pointing to continuing racial injustice, and the activism of young people (like Greta Thunberg) have galvanized younger generations. Most students will likely state the rate of change has been accelerating. The Strategic Highlight 5.1 has a great discussion of the benefits and drawbacks of stakeholder capitalism (via the arguments for and against BlackRock‘s pressure on Exxon).

8. How do perspectives on competitive advantage differ when comparing brick-and-mortar stores to online businesses (e.g. Best Buy versus Amazon, Old Navy versus Threadless).

Make recommendations to a primarily brick-and-mortar retail firm on how to compete more effectively with online firms. Do your suggestions fall mostly into the accounting, shareholder, or economic point of view on competitive advantage?

Online stores have a big advantage over brick-and-mortar stores in the accounting of assets because they have fewer tangible assets. For instance, most online companies keep their inventories in a handful of large distribution centers and ship products out from the most cost-effective location with the item in stock. Also, by having fewer locations, they reduce their overall assets. Thus, the online stores have lower inventories and fewer physical assets to carry. This improves their financial ratios and also improves the perspective of shareholder values. The economic value is often higher for online given the convenience of shopping from home and having items delivered.

9. For many people, the shareholder perspective is perhaps the most familiar measure of competitive advantage for publicly traded firms. What are some of the disadvantages of using shareholder value as the sole point of view for defining competitive advantage?

Using solely shareholder value to measure a company‘s competitive advantage has several limitations.

The most recent recession made painfully clear some of these shortfalls. First, a firm‘s short-term performance is difficult to determine because stock prices are highly volatile. Because of this variability, 19 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual total return to shareholders is a better measure for long-term performance. Second, the stock market is affected by macroeconomic factors, making it difficult to measure whether the stock price is influenced more by these factors or the firm‘s strategy. Lastly, in the short-term the stock market reflects the general mood of investors and might not represent firm performance accurately. For instance, during the recent recession many investors‘ ―irrational gloom‖ further contributed to the downfall of the stock market.

TRM Extra: Ethical/Social Questions 1. How do the perspectives on competitive advantage differ when comparing brick-andmortar stores to online businesses (e.g., Best Buy versus Amazon, Barnes & Noble versus Amazon, Old Navy versus Threadless, Nordstrom versus Zappos, and so on)?

Make recommendations to brick-and-mortar stores as to how they can compete more effectively with online firms. What are the social and economic consequences of the growth of online retailing?

Online stores have a big advantage over brick-and-mortar stores in the accounting of assets because they have fewer tangible assets. For instance, most online companies keep their inventories in a handful of large distribution centers and ship products out from the most cost-effective location with the item in stock. Also, by having fewer locations, they reduce their labor costs by hiring fewer employees. Thus, the online stores have lower inventories and fewer physical assets. This improves their financial ratios and also improves the perspective of shareholder values. Consumers often value the convenience of online shopping and home delivery above the social and logistical experience of going out into the actual stores.

2.

You work as a supervisor in a manufacturing firm. The company has implemented a balanced-scorecard performance-appraisal system and a financial bonus for exceeding goals. A major customer order for 1,000 units needs to ship to a destination across the country by the end of the quarter, which is two days away from its close. This shipment, if it goes well, will have a major impact on both your customer-satisfaction goals and your financial goals. With 990 units built, a machine breaks. It will take two days to get the parts and repair the machine. You realize there is an opportunity to load the finished units on a truck tomorrow with paperwork for the completed order of 1,000 units. You can have an employee fly out with the 10 remaining parts and meet the truck at the destination city once the machinery has been repaired. The 10 units can be added to the pallet and delivered as a complete shipment of 1,000 pieces, matching the customer‘s order and your paperwork. What do you do?

Students will certainly take different approaches on this issue, but the important aspect is that everyone understands the issues on both sides. As a supervisor it would be your responsibility to update the customer on the situation. In this instance, a phone call is appropriate to discuss the plan and assure the customer of your confidence in order fulfillment. The manufacturer could even go as far as guaranteeing the arrival of the 10 units with the other 990. If this does not happen, then the company could provide 20 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual the last 10 free of charge or provide a discount to the customer for its next purchase. Ensuring customer satisfaction is key in the balanced-scorecard approach. Thus, providing as much information as soon as possible and a contingency plan (purchasing 10 units from a competitor if it is a commodity) should mitigate the potential risk of an upset customer. Similarly, the company‘s financial performance must be considered. Ideally, fulfilling the order from in-house units and on time is ideal for both short- and longterm performance. However, if the 10 units are projected to arrive late, the manufacturer might be able to sacrifice some of the expected profits by purchasing, at a premium, the 10 units from a competitor.

This would ensure complete customer order fulfillment while still realizing the firm‘s lofty goals.

TRM Extra: Small Group Activities 1. At the next big family gathering, you want to impress your grandparents with the innovative ideas you have learned in business school. They have decades of experience in investing in the stock market and, from their college days, believe that economic profitability is the primary responsibility of business. You would like to convince them that a triple-bottom-line approach is the modern path to stronger economic performance. With your group members, prepare a casual yet informative speech that you can use to persuade them. They probably will not listen for more than two minutes, so you know you have to be clear and concise with interesting examples. You may want to reinforce your argument by consulting the article ―The Bottom Line of Corporate Good‖ by Ryan Scott published in Forbes (at www.forbes.com). Present your speech in whatever way your instructor requests—to your group, the entire class, or post a video on YouTube.

Students will often have strong views for or against a triple-bottom-line approach. Some will think the firm should stick to the financials, while others will want the firm to push for more progress in the social and ecological areas. Require students to draw a clear relationship between a firm‘s triple-bottom-line performance and its shareholder value creation performance. They should be encouraged to find an example firm that has a better triple-bottom-line performance than its rivals and outperforms them on shareholder value creation as well. They should be prepared to argue their case in the face of other examples, such as that of PepsiCo, in which their grandparents might argue that ―Purpose without Performance‖ can be detrimental to the long-term sustainability of their retirement portfolio. Students may argue in return that the grandparents‘ generation has created some of the damage to the planet and that they should all be willing to sacrifice some profitability to protect it for future generations.

This is an ideal assignment to use for assessment of critical reasoning skills and communication skills.

Consider including these elements in your grading rubric: •

Demonstrate literacy by ability to orally communicate ideas clearly, using advanced vocabulary, correct grammar, and correct business terminology.

•

Demonstrate ability to identify key information that is relevant to the problem and makes valid and reasonable use of the information.

•

Demonstrate ability to balance multiple objectives or problem dimensions and address trade-offs, considering both pros and cons of both sides of the issue.

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Strategic Management, 6e Teacher‘s Resource Manual

• Demonstrate ability to convincingly argue a perspective, strongly supporting conclusions with factual data, examples, and internally consistent logical argument.

2. As discussed in the chapter, a balanced scorecard views the performance of an organization through four lenses: customer, innovation and learning, internal business, and financial.

According to surveys from Bain & Company (a consulting firm), in recent years about 60 percent of firms in both public and private sectors have used a balanced scorecard for performance measures. (See ―Does Balanced Scorecard Still Apply‖ for a perspective.)

With your group, create a balanced scorecard for the business school at your university.

You might start by looking at your school‘s web page for a mission or vision statement.

Then divide up the four perspectives among the team members to develop some key elements for each one. It may be helpful to remember the four key balanced-scorecard questions from the chapter (see Exhibit 5.9).

For this exercise, we will use Georgia Tech as the example.

How do customers view us?

Customers (students and employers) view GT favorably. The college attracts high-quality undergraduate and graduate students who fuel superior school rankings and employment numbers.

GT is consistently rated one of America‘s top ten public universities MBA program is consistently rated top 30 by several publications 28th by BusinessWeek, 29th by U.S. News & World Report Employers view the MBA graduates approvingly #1 employment record among top 50 b-schools Second in the nation and #1 public school for MBA job placement How do we create value?

The GT business school produces ―MBA graduates with a strong work ethic, excellent analytical proficiency, and a demonstrated ability to lead.‖ This value is created through hiring exceptional faculty, employing an interactive MBA experience, and fostering a collegial environment through a close-knit student body, among others.

What core competence do we need?

The GT business school focuses on providing an innovative, truly first-rate education. Students are viewed as being well educated in business technology and operations management. The business school has strong ties to the corporate community, especially in the southeast and Atlanta. Additionally, outside the business school, the college is known for its superior engineering curriculum.

How do shareholders view us? (For public universities, the shareholders are the taxpayers who invest their taxes into the university.)

Again, the shareholders view the GT business school and entire public institution favorably. The college has increased its year-over-year operating revenue, net assets, and cash on hand in recent years.

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Strategic Management, 6e Teacher‘s Resource Manual

Related MiniCase Instructors may want to consider assigning and discussing the following MiniCase, which covers topics found in this chapter. Every MiniCase has assignable McGraw Hill Connect® case questions available.

MiniCase 5: Sustaining Shared Value: The Rise and Fall of Toms Shoes

CHAPTER 6

Business Strategy: Differentiation, Cost Leadership, and Blue Oceans Teacher Resource Chapter Contents

Teacher’s Resource Manual (TRM): Implementation Guid e

ii

Learning Objectives

1

Textbook Chapter Contents

2

Chapter Teaching Resources

3

Overview of Chapter

5

Classroom Outline

7

Strategy Highlights

19

myStrategy

20

Discussion Questions

22

TRM Extra: Social/Ethical Questions

23

TRM Extra: Small Group Activities

23

Related MiniCase

25 23

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Strategic Management, 6e Teacher‘s Resource Manual

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Strategic Management, 6e Teacher‘s Resource Manual

Teacher’s Resource Manual: Implementation Guide This Teacher‘s Resource Manual (TRM), supports delivery of your chosen curriculum and pedagogy.

This manual contains more than just guidance on how to cover concepts discussed in the sixth edition of Strategic Management; it also provides tips and best practices for how to utilize the full product suite (from the textbook to SmartBook® to Connect®). In addition, this manual includes a variety of supplemental teaching resources to enhance your ability to create an engaging learning experience for your students. Regardless of whether you teach in face-to-face traditional classrooms, blended (flipped) classrooms, online environments, or hybrid formats, you‘ll find everything you need in this improved resource.

The TRM follows the order of the textbook outline for each chapter and is divided into sections for each learning objective. Each section identifies the relevant PowerPoint slides from both the Lecture slides and the Supplemental Lecture slides (more on this below). This eases your preparation time for class as you can adjust slides as needed to ensure your students stay actively engaged throughout each session.

WHAT INSTRUCTOR RESOURCES ARE AVAILABLE? Within each section of the TRM you will find an assortment of examples, exercises, Connect® assignments, updates on the latest research, Strategy Smart Video discussions, and discussion questions and exercises from which you can choose to enhance your students‘ learning and engagement.

Within the Connect® Library, you will find the following: In the Test Builder tab, you can create tests from the Test Bank that can be printed or administered within your LMS. In the Instructor Resources, you can access all of the following items:         

Teacher‘s Resource Manual PowerPoints (Accessible) Application-Based Activities‘ accompanying Teaching Notes Create™ Case Support MiniCase Support Sample Syllabi Video Library Capsim‘s Capstone Simulation and Capsim IM Image Bank (for your customized PowerPoints)

36) This Teacher‘s Resource Manual is posted by chapter.

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Strategic Management, 6e Teacher‘s Resource Manual 37) Two sets of ADA-accessible PowerPoints are available with each chapter: a. Lecture slides cover chapter concepts and exhibits. b. Supplemental Lecture slides cover: i. ii. iii. iv.

Chapter Cases Strategy Highlights Implications for Strategic Leaders Strategy Smart Video selections (not part of the book, but an additional resource found here) v. Key Terms

38) Test Bank questions, found in the Library tab entitled Test Builder, are posted by chapter. You will find a variety of question types within the test bank such as Matching, Ranking, Multiple Choice, Select-All-That-Apply, True/False, Short Answer, and Essays to test student mastery across Bloom‘s Taxonomy (i.e. Understand, Apply, and Analyze).

39) Create™ Case Support (all cases are available in Create™ and selected ones in HBP) a. A case matrix that identifies the industry sector covered by each case, as well as the primary and secondary chapter alignments b. One-page case abstract for quick overview of each case c. Case Teaching Notes for instructor use only d. Case Financials in Excel files for the exhibit data in the most popular cases e. Case Strategic Financial Analysis template f. Instructions on How to Download SEC Financial Data into Excel Spreadsheets 40) MiniCase Support (all MiniCases are located in Part Four of the book) a. MiniCase Teaching Notes comprising suggested answers to the MiniCase discussion questions. In some instances, they also provide specific additional article and video resources to accompany each MiniCase.

41) Video Resources, located in the Video Library, provide links to supplemental video resources to accompany both the MiniCases and full-length Create™ cases, as well as links to all of the assignable videos in Connect®.

42) A link to Capsim’s Capstone Simulation and a Capsim Instructor’s Manual correlated to Strategic Management is provided; this simulation allows students to apply their knowledge of key strategy concepts.

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Strategic Management, 6e Teacher‘s Resource Manual

HOW CAN SMARTBOOK® ENHANCE MY STUDENTS’ PERFORMANCE? SmartBook® is assignable through Connect®, McGraw Hill‘s online assignment and assessment system.

One of the first fully adaptive and individualized study tools designed for students, it creates a personalized learning experience, giving students the opportunity to practice and challenge their understanding of core strategy concepts. The reporting tools within SmartBook® show where students are struggling to understand specific concepts.

Typically, SmartBook® is assigned by module (chapter), and instructors can set which learning objectives to cover as well as the number of probes the student will see for each assignment. Instructors also set the number of points a SmartBook® module is worth in the course. Usually, applying a minimal number of points for completion of each module is enough to encourage students to read the chapter.

Many instructors assign these modules to be completed before the class or online session.

SmartBook® provides several diagnostic tools for instructors to gauge which concepts their students struggle to understand. Below is the set of adaptive assignment reports available in SmartBook®:      

Progress Overview: View student progress broken down by module.

Student Details: View student progress details plus completion level breakdown for each module.

Module Details: View information on how your class performed on each section of their assigned modules.

Practice Quiz: This gives you a quick overview of your students‘ quizzes results.

Missed Questions Metacognitive Skills

By selecting ―Module Details‖ the instructor finds the results for the students in the class overall. These details reveal where in the chapters students might be struggling. The module gives the chapter section, average time spent, average questions per student correct/total, and the percentage of correctness (number of assigned items). Information about the most challenging sections for students can help instructors refine the focus of the next classroom or online session.

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Strategic Management, 6e Teacher‘s Resource Manual For more detailed analysis, SmartBook® captures students‘ confidence in their competency using the ―Metacognitive Skills‖ report. Below (a recreation of the Metacognitive Skills report), we find the second student is confident and mostly correct (91% in the correct & aware column) while the first student ―doesn‘t know what they don‘t know‖ (39% in the far-right column).

STUDENT

Student 1 Student 2 Student 3 Student 4 Student 5 Student 6 Student 7 Student 8 Student 9 Student 10

CORRECT and AWARE 61% 91% 81% 83% 76% 66% 77% 91% 93% 70%

CORRECT and UNAWARE 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

INCORRECT INCORRECT and AWARE and UNAWARE 0% 39% 3% 5% 0% 19% 0% 17% 3% 21% 9% 25% 3% 20% 2% 7% 2% 5% 6% 25%

APPLICATION EXERCISES, QUIZZES, AND TEST BANK What resources are available at the book level?

Connect® offers a wealth of content for both students and instructors. Application Exercises require students to apply key concepts to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor. Before getting into chapter-level assignments, let‘s look at the book-level assignments available.

Four exercises are available for instructors to assign beyond the chapter materials. These are 1) MiniCase Case Analyses, 2) Case Exercises, 3) Financial Ratio Reviews, and 4) MyStrategy exercises.

The Financial Ratio Reviews and MyStrategy exercises comprise our new Student Primer in Connect.

21) To encourage analytical thinking, each MiniCase from Part Four of the book is also an assignable application exercise (MiniCase Case Analysis). Each MiniCase is followed by four to five multiple-choice questions that assess students‘ understanding of the key issues presented in the MiniCase.

22) Case Exercises focus on the key symptoms and influences of a problem a firm might be facing, followed by a series of questions that help students understand how the firm eventually achieves a solution to that problem (or asks students to suggest a solution).

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Strategic Management, 6e Teacher‘s Resource Manual 23) Financial Ratio Reviews give students the opportunity to further hone their financial analysis skills; review exercises cover each type of financial ratio (activity, leverage, liquidity, market and profitability).

24) MyStrategy exercises for each chapter provide direct personal applications of strategy concepts to careers and lives to help students internalize the content.

What resources are available for each chapter and how should I integrate them in my course?

Consider assigning one or two Application Exercises per chapter. They are built around chapter learning objectives, so the instructor can choose based on their focus for each specific chapter. Several types of application exercises are available in each chapter. The newest additions are our Animated Videos, comprising three- to four-minute videos on key concepts or concepts that tend to challenge students the most. Each animation is accompanied by three to four multiple-choice questions to check student attention and comprehension. Comprehensive Case Analyses and our new On-Location Video Cases feature firms and industries different than those discussed in the textbook and provide relevant, topical information for students. Finally, Click-and-Drag exercises help students actively demonstrate their understanding of the associated learning objectives. Application Exercises can be assigned as preparatory exercises due before class (this is especially good for flipped classrooms), or after class as concept comprehension checks. Applications Exercises will generally be assigned as homework or practice as part of the overall class grade. A general rule of thumb would be to make application exercises worth 5 to 10 points each since these require time and thought.

To find the Applications in Connect®, go to ―Add Assignment‖ and then select ―Question Bank.‖ Application Exercises are organized by chapter. Instructors have the option to select for one attempt only, but they may want to give students unlimited or multiple attempts on the first few assignments to give students a chance to learn and navigate the system. (As the course progresses, instructors may want to tighten up the time on task and reduce the number of attempts to complete each exercise).

Chapter quizzes and full chapter test banks are available for assignment, and like the Application Exercises, are organized by chapter. The value applied to each question should be relatively low because numerous questions are usually assigned for each chapter. As such, make these questions worth 1 or 2 points each. The feedback given to students is time-flexible. Selecting feedback to be displayed after the assignment due date helps to keep students from giving the correct answers to other students while the questions are still available. For this reason, it is suggested that no feedback to quizzes and test bank exams be made available until after the assignment is due.

When should I assign these digital components?

To fully utilize the power of the digital components, instructors will often assign the SmartBook® reading and adaptive learning probes before class meets. Application Exercises can be completed either before or after class; if they are completed before class, they can sometimes serve as good springboards for class discussions. The chapter quiz makes a good check on comprehension of the material and may work best if assigned after each class period. The test bank serves as a good resource for building midterm or final exams.

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Strategic Management, 6e Teacher‘s Resource Manual More detailed information on SmartBook® and Connect® is available through several resources at McGraw Hill. A good starting point is your local Learning Technology Representative, who can be found here: http://www.mheducation.com/highered/platforms/connect/features-educators.html

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Strategic Management, 6e Teacher‘s Resource Manual

COURSE PREPARATION Helpful Suggestions Regarding Assignment Policies: Connect® gives instructors a wide array of flexibility in making assignments and creating grading policies. Instructors may choose to: 

assign as many assignments as appropriate given the level and time commitment expected for the class,



determine point values for each question/application that works within the total course percentages,



make available multiple attempts per assignment with options of accepting the highest score or averaging all the attempts together (several attempts are particularly good for homework assignments),



deduct points for late assignment submissions (percentage deduction per hour/day/week/etc.) or create hard deadlines thus accepting no late submissions,



show feedback on application/questions immediately upon submission or at the time the assignment is due for the whole class, create new assignments or questions from scratch, or edited versions from a variety of provided resources.

Throughout the TRM for each chapter, we will integrate materials from the Lecture PowerPoint slides, Supplemental Lecture slides, Connect® Application Exercises, and MiniCases. This integration of resources will allow for a cohesive presentation of the relevant resources at your disposal, helping you to convey these topics effectively and efficiently to your students.

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Strategic Management, 6e Teacher‘s Resource Manual

CHAPTER 6 Learning Objectives LO 6-1 Define business-level strategy and describe how it determines a firm‘s strategic position.

LO 6-2 Examine the relationship between value drivers and differentiation strategy.

LO 6-3 Examine the relationship between cost drivers and cost-leadership strategy.

LO 6-4 Assess the benefits and risks of differentiation and cost-leadership strategies vis-à-vis the five forces that shape competition.

LO 6-5 Evaluate value and cost drivers that may allow a firm to pursue a blue ocean strategy.

LO 6-6 Assess the risks of a blue ocean strategy, and explain why it is difficult to succeed at value innovation.

This chapter begins the strategy formulation phase of the Analyze, Formulate, and Implement (AFI) framework. The chapter takes a close look at business-level strategy and how to compete for advantage.

Business-level strategy details the actions managers take in their quest for competitive advantage when competing in a single product market. The chapter introduces the generic business strategies and then dives into detail on differentiation and cost-leadership strategies. At the firm level, performance is determined by value and cost positions relative to competitors. The chapter continues by integrating the five forces model (from Chapter 3) with business-level strategies to assess the benefits and risks of each strategy as they vary with industry conditions. Finally, the blue ocean strategy is discussed as a position combining both cost leadership and differentiation.

A chapter opening case on JetBlue Airways and two strategy highlights are included in the chapter for tangible applications of the theoretical frameworks discussed.

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Strategic Management, 6e Teacher‘s Resource Manual

Text Chapter Contents ChapterCase 6: JetBlue Airways: En Route to a New Blue Ocean?

6.1 Business-Level Strategy: How to Compete for Advantage (LO 6-1) CONNECT® INTEGRATION Matching/Multiple Choice: Business-Level Strategy 6.2 Differentiation Strategy: Understanding Value Drivers (LO 6-2) 6.3 Cost-Leadership Strategy: Understanding Cost Drivers (LO 6-3) CONNECT® INTEGRATION Whiteboard Video: Differentiation Strategy and Cost Leadership Strategy CONNECT® INTEGRATION Case Analysis: Toyota: Handling Recalls and Customer Satisfaction Strategy Highlight 6.1: Dr. Shetty: “The Henry Ford of Heart Surgery” 6.4 Business-Level Strategy and the Five Forces: Benefits and Risks (LO 6-4) CONNECT® INTEGRATION Click & Drag: Business-Level Strategy and the Five Forces Model 6.5 Blue Ocean Strategy: Combining Differentiation and Cost Leadership (LO 6-5, LO 6-6) Strategy Highlight 6.2: How JCPenney Sailed into a Red Ocean CONNECT® INTEGRATION Whiteboard Video: Blue Ocean Strategy CONNECT® INTEGRATION Matching/Multiple Choice: The Risks of Pursuing a Blue Ocean Strategy 6.6 Implications for Strategic Leaders ChapterCase 6 / Part II CONNECT® INTEGRATION Comprehension Case: JetBlue Airways: En Route to a New Blue Ocean?

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Strategic Management, 6e Teacher‘s Resource Manual

Chapter Teaching Resources SECTION

Title

RESOURCE TYPE

CHAPTERCASE 6

JetBlue Airways: En Route to a New Blue Ocean?

How JetBlue is Challenging American

Web Video (8 mins)

Business-Level Strategy

Connect® Matching/Multiple Choice

Differentiation Strategy and Cost Leadership Strategy

Connect® Whiteboard Video

Toyota: Handling Recalls and Customer Satisfaction

Connect® Case Analysis

Dr. Shetty TED talk

Web Video

Small Group Exercise: Ryanair

TRM Extra

Business-Level Strategy and the Five Forces Model

Connect® Click & Drag

Ethical/Social Issues: P&G response to Method

TRM Extra

Blue Ocean: Dr. Mauborgne

Web Video (6 mins)

Ethical/Social Issues: IKEA Sustainability

TRM Extra

What Is a Strategy Canvas?

Web Video (2 mins)

6.1: Business-Level Strategy: How to Compete for Advantage

6.2: Differentiation Strategy: Understanding Value Drivers 6.3: Cost-Leadership Strategy: Understanding Cost Drivers

6.4 Business-Level Strategy and the Five Forces: Benefits and Risks

6.5 Blue Ocean Strategy: Combining Differentiation and Cost Leadership

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Strategic Management, 6e Teacher‘s Resource Manual How It All Went Wrong at JCPenney

Web Video + Article

Blue Ocean Strategy

Connect® Whiteboard Video

The Risks of Pursuing a Blue Ocean Strategy

Connect® Matching/Multiple Choice

Small Group Exercise: Malls Need A Re-Purpose

TRM Extra

JetBlue Airways: En Route to a New Blue Ocean?

Connect® Comprehension Case

6.6: Implications for Strategic Leaders

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Strategic Management, 6e Teacher‘s Resource Manual

Overview of the Chapter 6.1

Business-Level Strategy: How to Compete for Advantage Business-Level Strategy represent the set of actions designed to develop a competitive advantage when competing in a single product market. In seeking to create a competitive advantage, leaders must understand the interdependence of industry effects and firm effects – as illustrated in Exhibit 6.1. The way in which a firm addresses the two prime competitive levels or value and cost determines its strategic position. Exhibit 6.2 portrays the interaction of competitive scope and strategic position in terms of the generic business strategies discussed in the following sections.

6.2

Differentiation Strategy: Understanding Value Drivers The goal of a differentiation strategy is to add unique features that will increase the perceived value of the offering. The possible areas of value adders can include product features, customer service, and “complements.” Exhibit 6.3 shows how a firm can take the same (or even an increased) cost basis on their offering and given increase “perceived value” charge a price that results in value creation.

6.3

Cost-Leadership Strategy: Understanding Cost Drivers The other generic business strategy is cost leadership. Under this strategy a firm seeks to create a competitive product at a lower cost – creating a competitive advantage which be used to either reduce the price (driving additional volume) or capture the addition value by selling at the competitor‘s price (see Exhibit 6.4). To pursue a cost leadership strategy, the firm must understand and optimize the various cost drivers. In addition to the cost of input factors, other cost levers include economies of scale (shown in Exhibit 6.5), and the impact of a learning curve (illustrated in Exhibit 6.6). While a learning curve results from an increase in cumulative output, the concept of an experience cure relates to process innovation (see Exhibit 6.7).

6.4

Business-Level Strategy and the Five Forces: Benefits and Risks In formulating the appropriate business strategy, many insights can be gained by employing the five forces model. This model divides the competitive landscape by examining:     

Threat of entry Power of suppliers Power of buyers Threat of substitutes Rivalry among existing competitors

Exhibit 6.8 summarizes the impacts of each of these forces mapped against the two generic strategies.

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Strategic Management, 6e Teacher‘s Resource Manual 6.5

Blue Ocean Strategy: Combining Differentiation and Cost Leadership The blue ocean strategy involves finding an untapped market space. Trader Joe‘s is an example of creating a differentiated product (high quality groceries) at a comparatively low cost (relative to Whole Foods). The blue ocean strategy requires the resolution of trade-offs between the low cost and differentiation strategies. This is done through value innovation – aligning innovation with total perceived consumer benefits. This concept is illustrated in Exhibit 6.9. Exhibit 6.10 shows the consequence of a blue ocean strategy gone bad – being stuck in the middle.

6.6

Implications for Strategic Leaders Despite only a handful of options for the definition of a business strategy, its development is not an easy task. However, when well-formulated and implemented, the strategy enhances a firm‘s chances of achieving superior performance. Therefore, formulation and implementation are the challenges confronting a firm‘s leaders. The leaders must resolve the trade-offs of the various options and successfully foresee changes in the market environment and competitive landscape.

In the case of unforeseeable changes, the firm must respond in a timely and effective manner.

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Strategic Management, 6e Teacher‘s Resource Manual

Classroom Outline ChapterCase 6 JetBlue Airways: En Route to a New Blue Ocean?

The opening ChapterCase discusses the story of the founding of JetBlue in 2000 as a firm to offer lower costs than even Southwest Airlines and yet with amenities and service closer to the large traditional airlines such as American and Delta. After initial success with this blue ocean strategy, the firm faced turbulence with several customer service problems and financial uncertainty. The founder/CEO was replaced in 2007. The firm more recently is exploring additional blue ocean ideas to expand and improve services while keeping costs low. The current CEO is searching for a good balance in the tradeoffs needed for a successful blue ocean business. One impediment to the blue ocean strategy relates to the difficulties in maintaining the cost/differentiation trade-offs as the breadth of marketplace expands.

Coupled with the woes the airline industry faces as a result of the COVID-19 pandemic, JetBlue was hit particularly hard and is currently ranked last based on several metrics.

INSTRUCTOR SUPPLEMENT SLIDE 3

STRATEGY SMART VIDEO EXAMPLE INSTRUCTOR SUPPLEMENT SLIDE 18 This slide links to an eight minute CNBC story covering the history of JetBlue up to its troubles leading into 2019.

ChapterCase 6 Part II The closing ChapterCase provides more information on JetBlue‘s problematic position of pursuing a blue ocean strategy. Simply stated while JetBlue successfully created a blue ocean strategy resulting in a competitive advantage, they were not able to sustain that advantage. JetBlue failed to reconcile the trade-offs inherent in the mixture of differentiation and cost-leadership. Between 2007 and 2019, JetBlue lagged the Dow Jones U.S. Airlines by more than 35 percent. Leadership is currently working to reverse this trend with new initiatives (and a possible merger with Spirit Airlines).

ChapterCase 6 Discussion Questions 7. Despite its initial success, why was JetBlue unable to sustain a blue ocean strategy?

Its value-added investments in equipment and services cost more to offer than the revenue that they generated. As the firm grew, they went from trying to straddle focused differentiation/focused cost leadership to a more challenging position of trying to straddle broad differentiation/broad cost 7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual leadership. Simply stated, what was feasible in a limited number of focused routes was not cost effective in the expanded market. There is an excellent link here to examine strategic groups from Chapter 3.

Remember that it is very difficult for firms to move from one strategic group to another, and JetBlue is a particularly good example of that reality.

5. The Wall Street Journal asked JetBlue‘s chief marketing officer, Marty St. George, ―What is the biggest marketing challenge JetBlue faces?‖ His response: ―We are flying in a space where our competitors are moving toward commoditization. We have taken a position that air travel is not a commodity but a services business. We want to stand out, but it‘s hard to break through to customers with that message.‖ 2a. Given St. George‘s statement, which strategic position is JetBlue trying to accomplish: differentiator, cost leader, or blue ocean strategy? Explain.

With no other information than that statement, one would have to conclude that JetBlue is attempting a differentiation strategy. However, their price positioning in the market, their communication to customers, and their recent actions (see next question) all suggest that JetBlue is also trying to compete with the cost leaders. This mixed message is characteristic of a ―stuck in the middle‖ strategy. In looking at the initial routes of JetBlue (e.g. LAX to NYC), there was a sufficient market share that favorably responded to the JetBlue perceived market value of additional customer service/features at a competitive cost; however, as the number of routes expanded, the market demanded switched to a distinctly ―low cost‖ perspective. This shift left JetBlue in a “stuck in the middle” strategic position.

2b. Which strategic moves has the team around CEO Robin Hayes put in place, and why?

Explain whether they focus on value creation, operating costs, or both simultaneously. Do these moves correspond to St. George‘s understanding of JetBlue‘s strategic position? Why or why not? Explain.

Hayes‘s decision to reduce legroom is counter to a differentiation strategy and the message communicated by the CMO. His decision to raise fees for checked baggage runs counter to a strategy to compete effectively with Southwest but is not too dissimilar to ultra-low-cost airlines, like Ryanair or Spirit. It is also counter to customer service, as it means that customers will lug their own baggage more often and there will be more competition for space in overhead bins. In a nutshell, JetBlue appears to be evolving to a ―cost leadership‖ strategy. Their recent bid for Spirit Airlines also showcases that they are moving towards a ―cost leadership‖ strategy.

3. Consider JetBlue‘s value curve in Exhibit 6.11. Why is JetBlue experiencing a competitive disadvantage? What recommendations would you offer to JetBlue to strengthen its strategic profile? Be specific.

To escape from its ―stuck in the middle‖ position, JetBlue needs to move its curve either up or down. If it is going to try to compete as a differentiator, as St. George suggests, then the highest priority areas for improvement are likely to be customer service and reliability. If it wants to compete more effectively with the low-cost airlines, it needs to significantly pare back costs by reducing services and amenities.

This would likely be the more radical of the two position changes. The moves regarding reduced legroom and increased baggage fees, suggest that JetBlue is moving to compete in the ultra-low-cost 8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual airlines. To reinforce this strategy, JetBlue needs to focus on value innovations that continue to reduce operating costs per passenger mile.

4. JetBlue CEO Robin Hayes is contemplating adding international routes, connecting the U.S. East Coast to more European destinations. Would this additional international expansion put more pressure on JetBlue‘s current business strategy? Or would this international expansion require a shift in JetBlue‘s strategic profile? Why or why not?

If a strategic repositioning is needed, in which direction should JetBlue pivot? Explain.

The actions Mr. Hayes is considering would move JetBlue more in the direction of the legacy hub-andspoke carriers. While the international routes tend to be quite profitable, they can require increased fixed and variable costs. A key factor may be the success of the new airplane to provide longer range at lower costs for JetBlue. The airline, however, will not be the only one using newer more efficient planes from Airbus and Boeing, thus bringing in a question about the sustainability of any competitive advantage gained from the move. It appears JetBlue is moving towards reducing its differentiation to focus on costper-seat savings for the airline. Thus, they may shift out of their attempted blue ocean towards cost leadership unless they can find new elements to spur value innovations.

6.1 BUSINESS-LEVEL STRATEGY: HOW TO COMPETE FOR ADVANTAGE LO 6-1 Define business-level strategy and describe how it determines a firm‘s strategic position.

LECTURE SLIDES 3–9 EXAMPLES Different generic strategies can lead to competitive advantage, even in the same industry. For example, Rolex and Timex both compete in the market for wristwatches, yet they follow different business strategies. Rolex follows a differentiation strategy: It creates a higher value for its watches by making higher-quality timepieces with unique features that last a lifetime and that bestow a perception of prestige and status upon their owners. Customers are willing to pay a steep premium for these attributes.

Timex, in contrast, follows a cost-leadership strategy: It uses lower-cost inputs and efficiently produces a wristwatch of acceptable quality, highlights reliability and accuracy, and prices its timepieces at the low end of the market. The issue is not to compare Rolex and Timex directly—they compete in different market segments of the wristwatch industry. Both can achieve a competitive advantage using diametrically opposed business strategies. This is because both have a clear strategic profile. Rather, the idea is to compare Rolex‘s strategic position with the next-best differentiator (e.g., Tag Heuer), and Timex‘s strategic position with the next-best, low-cost producer (e.g., Swatch). In the preceding example, Rolex focuses on a small market segment: affluent consumers who want to present a certain image. Timex offers watches for many different segments of the mass market. If watches aren‘t a relatable example to your class, think of other extreme examples you can use to demonstrate the differences in strategy (most affordable car, for example, Nissan Versa) vs. most expensive car (for example, Bugatti Chiron). A good video to show (including chirpy British narrator) is a factory tour of Bugatti: https://www.youtube.com/watch?v=4yLrCKcAufI The process of buying and manufacturing 9 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual the car is completely different from a normal consumer experience, and it always gets a good response from students.

DISCUSSION TOPICS You may want to use Exhibit 6.1 to pull together several topics touched on in previous chapters to open up this chapter with the class. Chapter 1 noted that competitive advantage is based on the interdependence of firm and industry effects (on the left side of the figure). The tan boxes at the top of the figure bring out industry elements discussed in Chapter 3. The gray boxes in the lower part of the diagram are the primary subjects for this chapter. There are two fundamentally different business strategies: differentiation and cost leadership. They are generic due to their wide application to disparate organizations. The scope of competition must also be considered. The business can target a broad audience or a narrow or niche market. Strategic position is the profile based on value creation and cost.

Higher value tends to require higher cost, thus the need for trade-offs for businesses to choose between a cost or value position. The generic strategies will build on the marketing courses the students have had prior to this strategy course. The narrow and broad competitive scope complements well with selling into broad or niche target markets.

CLASS EXERCISES We have at times split the class into small groups and assigned each group a different consumer industry, and then asked each group to identify firms in the industry and where they fit in the 2×2 rubric in Exhibit 6.2. Industries the students are very familiar with are restaurants, shoes, personal computers, and automobiles.

We find it helpful to remind the students of the strategic group discussion (in Chapter 3) as this tool identifies business strategies that would be similar or different from one firm to the next. If used within a large industry, the results should yield a list of firms that make up strategic groups and are direct competitors with each other within the groups. You could, for example, ask students to analyze the airline industry. Make sure that they do not limit themselves to one firm in each box of the rubric. Begin with the ChapterCase on JetBlue to start them off. After they have completed their analysis in small groups, then pull up the strategic group map from Chapter 3 (Exhibit 3.8) and invite students to compare/contrast their output with the strategic groups map.

For a different sort of exercise, you can use the following table to discuss advertising across different business level strategies. The columns show some optional advertising approaches used by companies to communicate the value of their product in order to influence your buying decisions, and the rows list some familiar product categories. For each product category, first consider how each type of advertising might influence you, then rank from 1 (not at all) to 5 (strong influence) and enter that number in the cell. Most consumers use different criteria to make purchase decisions for different categories of product. Compare your rankings with those of other students in the class. What approaches not included here have a stronger influence on your buying decisions? Second, for each advertising approach, decide whether you think it would be more likely to be used for products sold by a company using a differentiation (D), cost-leadership (CL), or integration (I) strategy and enter the letter abbreviation of that strategy under the column heading. Compare your responses with those of other students and discuss why differentiators and cost leaders may choose similar or different advertising approaches.

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Strategic Management, 6e Teacher‘s Resource Manual TV/Movie Product Placement

Celebrity Endorsement

Sustainability Claims

Social Media Comments

Point of Purchase Display

Print Media Ads

Low Price Assurance

Mobile Devices Casual Clothing Sporting Goods Airline Ticket Car Food Computer

This exercise would work best as a small group discussion that is later selectively shared with the full classroom. Ask each student to complete the table before arriving in class. Then match their answers against those of other students in a group of two or three. Ask them to draw on what they know about marketing to make a determination of the effectiveness (reach, richness, relevance, and cost) of each type of communication for that industry. Richer media allow more information to be communicated.

Communication that is more narrowly targeted toward the customer is higher in relevance. Focus strategies may be communicated more often using high relevance media. Differentiation strategies need richer media to communicate information about products and services. Cost-leadership strategies need very low-cost media.

INTEGRATION Matching/Multiple Choice Exercise: Business-Level Strategy This exercise covers the textbook examples of firms using a variety of generic business-level strategies.

The student will read the brief application case and move the firm name into the correct box provided. A related quiz with questions follows the interactive activity. 

Difficulty: Medium  Blooms: Apply

6.2 DIFFERENTIATION STRATEGY: UNDERSTANDING VALUE DRIVERS LO 6-2 Examine the relationship between value drivers and differentiation strategy

LECTURE SLIDES 10–14 11 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual In this section, we discover that firm effects are much larger than industry effects on firm performance.

This means that managerial action and strategic leadership are important in determining the overall firm‘s performance. This is also important for the purpose of this strategic management course. If industry was the dominant determinant of performance the role of strategy would be much smaller as the main decisions would be completed when the industry to enter was determined.

DISCUSSION TOPICS Differentiation strategy will add unique or otherwise rare features to increase the value as viewed by the customers. This value in turn will drive a higher price for the product or service. Alternatively, differentiators excel at customer service. Managers must be able to identify unmet customer needs and find ways to satisfy them or exceed customer expectations. Firm C in Exhibit 6.3 is typically the case, as driving higher value will often increase cost. As long as the value gap is increased (value increases MORE than cost), the differentiation will benefit the firm.

GoPro has a focused differentiation strategy the students may enjoy discussing. It sells cameras for sports

enthusiasts that are continually innovated to be smaller and more effective for its target market use.

6.3 COST-LEADERSHIP STRATEGY: UNDERSTANDING COST DRIVERS LO 6-3 Examine the relationship between cost drivers and cost-leadership strategy.

LECTURE SLIDES 15–22 EXAMPLES The South African company De Beers has long held a very strong position in the market for diamonds because it tightly controls the supply of raw materials. The aluminum producer Alcoa has access to lower-cost bauxite mines in the United States, which supply a key ingredient for aluminum.

Economies of scale are illustrated in Exhibit 6.5, which visually shows the range of scale impacts. Royal Caribbean Cruises is betting on economies of scale. It launched its Oasis class $1.4B luxury cruise ships, the Allure of the Seas and Oasis of the Seas—the world‘s largest at 20 stories above the sea and stretching more than four football fields. The Oasis of the Seas can accommodate more than 5,400 passengers. Will it allow Royal Caribbean to capture economies of scale, or will it prove too large, leading to diseconomies of scale?

The example of W. L. Gore for diseconomies of scale comes from the very readable book The Tipping Point by Malcolm Gladwell. In the book, Gladwell goes on to discuss a Dunbar Number, which is named after a U.K. scholar (Robin Dunbar). He argues that humans have cognitive limits at around 150 friends. Gore has expanded the idea into effective work group size limits due to excess bureaucracy and management that slows down decision making as the group size grows.

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Strategic Management, 6e Teacher‘s Resource Manual

INTEGRATION Case Analysis: Toyota: Handling Recalls and Customer Satisfaction This case analysis explores Toyota‘s customer service from early successes with the Lexus to more recent problems the firm has had. The activity reinforces the value drivers discussed in the textbook.

Students will read the case and then answer the four questions following it. 

Difficulty: Medium  Blooms: Apply

Follow-Up Activity: The instructor can build on these concepts by having the class or small groups develop examples of firms using the other two value drivers (product features and complements).

Examples can be successful or failed attempts of firms building competitive advantage with these levers.

INTEGRATION Whiteboard Video: Differentiation and Cost Leadership Strategy This animated video case analysis provides an overview of these two generic business strategies. It can complement or substitute for a short classroom lecture on the concepts. 

Difficulty: Medium  Blooms: Apply

Strategy Highlight 6.1 Dr. Shetty: “The Henry Ford of Heart Surgery” Click here for a summary of the Strategy Highlight covering Dr. Shetty‘s strategy of driving down health costs involving process innovation – especially around open-heart surgery. His approach supports the belief that a surgery costing $100,000 or more can be reduced to a cost of $2000.

INSTRUCTOR SUPPLEMENT SLIDE 5: DR. SHETTY: “THE HENRY FORD OF HEART SURGERY” STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 16 In this TEDx video, "It's not a solution if it's not affordable: Dr. Devi Prasad Shetty at TEDxGateway 2013,‖ Dr. Shetty discusses the status of heart surgeries in India.

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Strategic Management, 6e Teacher‘s Resource Manual DISCUSSION TOPICS Consider Southwest Airlines, what happens to competitive advantage when a firm with a cost-leadership strategy changes its target customer from one with basic needs to one with more complex needs or expands into high cost/high time delay airports as Southwest has done with its moves into Newark, LaGuardia, Los Angeles, and San Francisco, and added the increased complexity of international flights? Which parts of the value chain have experienced increased costs?

Scale benefits explain the rise of superstores that are often 200,000 square feet or more. Retailers that have leveraged the superstore concept to emerge as category killers are Toys ―R‖ Us, Home Depot, Barnes & Noble, and Best Buy. Now in a new wave of industry evolution, Amazon is ―killing the category killers.‖ Ask students if they can explain why this is happening using economies of scale and learning. They should be able to identify much higher throughput through Amazon‘s fulfillment centers than through any individual store. They may also point out that consumers do their own product selection and checkout in Internet commerce, raising the level of sales per employee at Amazon.

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity comparing the Ireland-based low-cost airline Ryanair with JetBlue.

6.4 BUSINESS-LEVEL STRATEGY AND THE FIVE FORCES: BENEFITS AND RISKS LECTURE SLIDE 23 LO 3-4 Assess the benefits and risks of differentiation and cost-leadership strategies vis-a-vis the five forces that shape competition.

This section integrates the five forces model from Chapter 3 with business level strategies to compare differences in competitive positioning (low-cost or differentiation). Benefits and risks of each position are also discussed.

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for information on for information on an extended discussion about a hypothetical response

by P&G to upstart competitors like Method.

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Strategic Management, 6e Teacher‘s Resource Manual

INTEGRATION Click & Drag: Business-Level Strategy and the Five Forces Model This exercise will help students identify the benefits and the risks associated with choosing either a differentiation strategy or a cost-leadership strategy and the forces that impact that choice. 

Difficulty: Medium  Blooms: Apply

6.5 BLUE OCEAN STRATEGY: COMBINING DIFFERENTIATION AND COST LEADERSHIP LO 6-5 Evaluate value and cost drivers that may allow a firm to pursue a blue ocean strategy.

LECTURE SLIDES 24–29 STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 14 This slide links to a six-minute presentation by Renee Mauborgne, coauthor of Blue Ocean Strategy. It provides a brief overview of the thinking behind this theory.

EXAMPLES Success in a blue ocean strategy doesn‘t imply that the firm must be the highest-value creator and the lowest-cost producer in its respective industry. Whether a blue ocean strategy can lead to competitive advantage depends on the difference between value creation (V) and cost (C), and on the resulting magnitude of economic value created (V – C). What matters in gaining competitive advantage is the relative difference in economic value creation in comparison to industry rivals. The goal of a blue ocean strategy is therefore to achieve a larger economic value created than that of rivals pursuing a differentiation or low-cost-leadership strategy. To illustrate this point, compare three retail chains: Nordstrom, Target, and Walmart. Nordstrom is a differentiator; Walmart is a cost leader; Target has a blue ocean strategy. Nordstrom is an upscale retailer pursuing a differentiation strategy by focusing on a superior customer experience in a luxury department store setting. Target has been able to effectively compete with Nordstrom mostly by achieving a much lower-cost position, while offering an acceptable shopping experience when compared with Nordstrom. On the other hand, Target has been able to compete with Walmart by building similar skills in efficient logistics. Target almost achieves cost parity with Walmart. At the same time, Target outdoes Walmart in product selection, merchandising, and store 15 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual layout so that its stores offer a higher-quality shopping experience for the customer. Target creates significantly more value in the minds of customers than does Walmart with its no-frills approach. If Target is successful with its blue ocean strategy, it achieves the highest economic value.

Examples of ways in which firms can simultaneously add value and lower cost: Through techniques such as total quality management, companies design and build products with quality in mind, while increasing their differentiated appeal. By building in better quality, companies lower the cost of both production and after-sale service requirements. From the customer‘s perspective, the product has increased value because it reduces the total cost of ownership. Advances in manufacturing and information technology have made feasible mass customization—the manufacture of a large variety of customized products or services done at a relatively low unit cost. In the car industry, Toyota was the first to introduce lean manufacturing, allowing it to mass customize vehicles and produce higher quality at a lower per-unit cost. Other companies are able to conquer this trade-off by using the Internet. You can design your own T-shirts at threadless.com or create customized sneakers at nike.com.

LO 6-6 Assess the risks of a blue ocean strategy, and explain why it is difficult to succeed at value innovation.

Toyota introduced lean manufacturing to resolve the trade-off between quality and cost. This process innovation allowed Toyota to produce higher-quality cars at a lower unit cost, and to perfect the mass customization of cars. Lean manufacturing, over time, has become a necessary but not sufficient condition for competitive advantage in the auto industry. Today, if a carmaker can‘t produce highquality, mass-customized cars at low cost, it is not even in the game. More recently, Toyota stumbled as questions arose whether the company could maintain its stellar quality record while growing so fast.

Korea‘s Hyundai stepped into this void, offering cars that surpass Toyota in quality while attempting to provide luxury similar to Lexus vehicles. Hyundai‘s managers carved out a strong strategic position for the company by focusing on resolving the trade-offs between luxury, quality, and cost. The ups and downs in the car industry clearly show that competitive advantage is transitory. It is a difficult quest to gain competitive advantage; it is even more difficult to sustain it. The tools of strategic management aid managers in this important challenge.

Strategy Highlight 6.2 How JCPenney Sailed into a Red Ocean Click here for a summary of the Strategy Highlight covering a firm that for years had a successful costleadership strategy and their disastrous attempts to shift to a blue ocean strategy.

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Strategic Management, 6e Teacher‘s Resource Manual

INTEGRATION Whiteboard Video: Blue Ocean Strategy This video will help to explain Blue Ocean Strategy as a variation on Porter‘s generic strategies. 

Difficulty: Medium

 Blooms: Apply

INTEGRATION Matching/Multiple Choice: The Risks of Pursuing a Blue Ocean Strategy This activity shows students that just as there can be benefits to pursuing a Blue Ocean Strategy, there are also risks. As a manager, it‘s important to weigh the benefits and risks associated with pursuing this type of strategy. 

Difficulty: Medium  Blooms: Apply

DISCUSSION TOPICS Drawing on knowledge from your supply chain and operations management majors, ask students to discuss how the digital revolution in manufacturing might create new opportunities for blue ocean strategies (see ―Digital Manufacturing: The Revolution Will Be Virtualized‖ McKinsey Quarterly).

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for a discussion building from the textbook discussion of IKEA and its sustainability initiatives.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 15

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Strategic Management, 6e Teacher‘s Resource Manual This slide links to a 2 ½ minute video, that illustrates the strategy canvas for two rivals in the airline industry, linking it nicely to the ChapterCase on JetBlue.

6.5 IMPLICATIONS FOR STRATEGIC LEADERS INSTRUCTOR SUPPLEMENT SLIDE 8 CLASS EXERCISE Students enjoy the opportunity to practice implementing generic strategies. You can choose any consumer industry and assign one of the four generic strategies to each team of students. Then invite the students to plan a new business in that industry with that strategy. Ask them to identify the value and cost drivers and describe how they will implement them for their firm. Then ask them to develop a marketing message for their firm in the form of a Facebook page, a video ―celebrity‖ endorsement, a podcast radio ad, or a flip chart ―billboard.‖ Ask the class to vote on which business/product they would visit/buy most often. Some retail industries you might use: yogurt shops, coffee shops, gyms, hotels, or spas. Some consumer products you might use: shampoo, frozen pizzas, or salad dressings.

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity on the oversupply of shopping malls in the United States and some thoughts on how to repurpose them.

INTEGRATION Comprehension Case: ChapterCase—JetBlue Airways: En Route to a New Blue Ocean?

Here, we provide both Parts 1 and 2 of this case, accompanied by short-answer questions that students can complete and submit. Due to the nature of these open-ended questions, they require manual grading. 

Difficulty: Medium  Blooms: Apply

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Strategic Management, 6e Teacher‘s Resource Manual 

Strategy Highlights Strategy Highlight 6.1 Dr. Shetty: “The Henry Ford of Heart Surgery” This is a useful example of cost leadership for students because it shows that the cost-leadership strategy is not confined exclusively to commodity products or frequently purchased items. It also incorporates more than one aspect of cost drivers, mentioning learning curves, economies of scale, and input costs.

One aspect of Dr. Shetty‘s strategy involves a significant reduction of input costs – the U.S. counterparts are paid 2 to 3x the annual salary of a cardiac surgeon in India. The high-volume aspects also allow for ―economies of scale‖ (e.g. reduced cost of sutures) as well as learning curve and experience curve advantages. While many worry that this high-volume approach will result in compromised quality, Dr. Shetty has been able to demonstrate sustained high-quality even in this high-volume/low-cost environment.

Strategy Highlight 6.2 How JCPenney Sailed Into A Red Ocean This strategy highlight discusses how JCPenney went from one of the top department stores in the United States to filing for bankruptcy. In the face of fierce competition from Amazon, JCPenney managed to speed up its demise with a bad business strategy. Hired away from Apple in 2011, newly appointed CEO Ron Johnson tried to shift JCPenney from its tried-and-true cost leadership strategy to a blue ocean strategy. Johnson misapplied knowledge from his time at Apple to JCPenney with disastrous results (providing a nice link to the importance of strategic leadership discussed in Chapter 2). This highlight provides several opportunities to discuss how red ocean competition can be particularly brutal.

It shows that not all strategies are right for all firms, and it discusses how difficult it is for firms to change their strategies (with a nice link back to a discussion of strategic groups from Chapter 3). This highlight also demonstrates the inherent trade-offs that underly generic business strategies (costs vs. value). A series of leadership changes ends with JCPenney succumbing to bankruptcy in 2020.

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Strategic Management, 6e Teacher‘s Resource Manual

my Strategy INSTRUCTOR SUPPLEMENT SLIDE 10: LOW-COST AND DIFFERENTIATED WORKPLACES Here, we encourage the student to take what they have learned about competitive advantage and apply it to his/her own career. Encourage students to spend a few minutes looking at their ideas about future trends and how it may impact their career options.

1. Employees and consultants say the Amazon workplace is the epitome of a ―do more for less cost‖ environment. We recognize this is a hallmark goal of a cost-leadership business strategy.

But ask yourself this key question: is it the type of high-pressure work environment in which YOU would thrive?

Some of our students who are looking for the ―what to do after graduation‖ have found this exercise to be a useful way to think about what they are good at and what they would probably want to stay away from as far as a future career. An industry approach can help identify longer range trends and also lesser known firms that might be good candidates for employment. They may want/need to further explore the tradeoffs which define their personal ―value innovation.”

2. Amazon has surpassed 650,000 employees and was the second publicly traded company in the world to hit $1 trillion market capitalization (just after Apple). The company offers bold new ideas as a retailer and is under an intense pressure to deliver on its goals. The allure from this type of success is compelling and offers tremendous rewards to many employees, shareholders, and customers. What aspects of success are you seeking in your professional career?

In the United States, and globally, among the top industries for job opportunities are health care, Internet services, and perhaps the energy fields. While there is no single measurement of success – for some it is measured simply by the size of salary commanded, other attributes may include:   

Work/life balance.

Fulfillment of a ―sense of mission.‖ Ability to mentor and inspire co-workers.

Whatever is the ―critical success factor‖ held by the student/job seeker, it is important to understand the alignment of personal goals with a firm‘s culture.

3. Imagine that you are about to launch into a new project, job, firm, or industry to move forward in your career. Which trade-offs are you willing to accept? Which trade-offs are you not willing to accept?

For some, a ―success at all costs‖ philosophy would cause them to accept a job that involved 80 hours per week, extensive travel away from home and substandard living conditions—be it a consulting firm or the military—such an environment could be thrilling, but given other definitions of success, these

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Strategic Management, 6e Teacher‘s Resource Manual conditions could well be abhorrent. Ability to enjoy free time, an environment hallmarked by teamwork and collegiality, and/or geographic local may represent the paramount tradeoff in a job search.

This could be a particularly interesting conversation to have in class, especially if you have students that represent multiple generations. You may find that millennials on average are more likely to ―work to live‖ than ―live to work.‖ Gen Zers on average may find a high pressure/high reward environment more attractive at least in the short-term to learn as much as possible early in their careers. A number of students may suggest that they would prefer a small firm or an entrepreneurial start-up to a 350,000person firm, no matter what pressure level is involved.

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Discussion Questions 5. What are some drawbacks and risks to a broad generic business strategy? To a focused strategy?

As the text notes, there is no single correct generic strategy for a specific industry. A drawback of a broad business strategy is that the firm may be blinded to new entrants that enter the industry through a niche approach. Drawbacks to a more focused approach could be that the niche you target will not grow or may decline; economic performance will have higher variability for smaller segments than broader populations; and if economy of scale is important, it can be hard to be large enough to compete with a focused strategy.

6. In Chapter 4, we discussed the internal value chain activities a firm can perform (see Exhibit 4.8). The value chain priorities can be quite different for firms taking different business strategies. Create examples of value chains for three firms: one using cost leadership, another using differentiation, and a third using a value innovation businesslevel strategy.

Ask the students to review Chapter 4 to answer this question. In general, cost-leader firms will focus on primary activities and making them the most efficient. Differentiated firms will focus on secondary activities and providing improved customer service, while value innovation firms will choose a combination of these activities to strategically extend value while holding or reducing costs.

7. The chapter notes there are key differences between economies of scale and learning effects. Let us put that into practice with a brief example. A company such as Intel has a complex design and manufacturing process. For instance, one fabrication line for semiconductors typically costs more than $1.5 billion to build. Yet the industry also has high human costs for research and development (R&D) departments. Semiconductor firms spend an average of 17% of revenues on R&D. For comparison the automobile industry spends under 4% of sales on R&D. Thus, Intel‘s management must be concerned with both scale of production and learning curves. When do you think managers should be more concerned with large-scale production runs, and when do you think they should be most concerned with practices that would foster or hinder the hiring, training, and retention of key employees?

Many students will bring work experience to the classroom. At the MBA level, many students will have professional work experience and can make some contributions on HR practices. One point of this question is to note that HR practices will tend to be quite different for a differentiated firm than a costfocused business. Intel would want to focus on retaining its employee base since the learning curves and experience curves in both design and manufacture of its product is significant. Its recruiters undertake a thorough recruitment and hiring screening process to try to bring the right skill sets into the firm. Intel also commits major funding into training, including educational support for advanced degrees, and the firm encourages a sabbatical leave for employees with many years of service.

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TRM Extra: Ethical/Social Questions 1. Suppose Procter & Gamble (P&G) learns that a relatively new startup company Method (www.method@home.com) is gaining market share with a new laundry detergent in West Coast markets. In response, P&G lowers the price of its Tide detergent from $18 to $9 for a 150-oz. bottle only in markets where Method‘s product is for sale. The goal of this ―loss leader‖ price drop is to encourage Method to leave the laundry detergent market. Is this an ethical business practice? Why or why not?

Notice we did not ask if this is legal. There are many practices that are legal but may not be considered ethical or moral behavior. A loss leader approach is not uncommon in retailing and larger firms can afford to do it longer than smaller firms. Students will differ on whether this is ethical, but it is a practice that smaller firms such as Method should be prepared to address. (In the case of Method, it is highly differentiated in their products and target customers and are unlikely to be significantly affected by such a price move.)

2. In the chapter discussion on value innovation, IKEA is noted as a firm that has successfully applied these techniques. What roles, if any, do sustainability and triplebottom-line factors have in the success of IKEA as a leader in the furniture industry? (See Chapter 5.)

IKEA takes a three-pronged approach to sustainability. It makes, promotes, and sells products that help people live more sustainably; it increasingly acquires raw materials and energy from sustainable sources; it strives to have a positive impact upon the communities in which it does business. All three of these sustainability platforms are closely tied to the firm‘s vision and values (Chapter 2). Its value innovation strategy, however, is highly dependent upon reducing costs and weight in their products, as well as long-term access to adequate supplies of wood and other materials.

TRM Extra: Small Group Activity 1. Ryanair clearly has a cost-leadership strategy. They are providing lower-value services and driving their costs low or generating revenues from fees other airlines are not charging to offset some of their costs. We chose Ryanair as an example of low-cost leadership to extend the chapter case discussion with a non-U.S. example. Students enjoy finding out about the Irish company and reflecting on how, in many ways, Ryanair is in the leadership position on cost and price structures.

Ryanair based in Dublin, Ireland has been renowned in Europe as a firm that can make a profit on a $20 ticket by imposing numerous fees and surcharges. The airline has sought to be the lowest of the low-cost providers in the EU with a ―no frills get you from point A-to-B-model.‖ Ryanair is on record as saying it wants to be the ―Amazon.com of travel in Europe‖ by bringing in competitors‘ price comparison, hotel discounts, and even concert tickets. Check out the company website (http://www.ryanair.com) and consider the questions that follow.

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Strategic Management, 6e Teacher‘s Resource Manual 1a. If you were a competitor in the European market, such as British Airways or Lufthansa, how would you compete against Ryanair, knowing your cost structure would not allow price parity? If you were a low-cost leader like EasyJet, how would you compete against Ryanair?

The website link is provided here as the firm may well change its policies on disclosure of fees. This is especially true as other more traditional airlines are also imposing more fees on the flying passengers.

As of the winter of 2020, the home page for Ryanair has a link for fees under the ―Help‖ tab at the top right menu. (https://www.ryanair.com/us/en/useful-info/help-centre/fees).

The traditional European airlines do not have a cost structure to compete with Ryanair. U.S. airline attempts to lower cost structures (such as Delta‘s Song or Continental Lite) were a dismal failure.

Therefore, the competitors should compete against Ryanair on differentiated service and acknowledge some ultra-low price routes will be difficult to grow in share. At the same time, the competitors, however, should be sure that consumers are comparing ―fully loaded‖ costs rather than comparing an $8 seat on Ryanair with a $150 seat on Aer Lingus. The competition should not be shy about posting comparable rates for Ryanair and their own prices (with fees included). Many customers will make different decisions if the actual travel costs are $87 for Ryanair versus $165 for Aer Lingus.

1b. What similarities and differences do you find about Ryanair compared to JetBlue from the ChapterCase?

Perhaps the most salient conclusion that students will reach is that Ryanair makes no pretenses of offering high levels of customer service. They do not have any issues with being ―stuck in the middle‖ as they are firmly focused on cutting all costs and charging additional fees for what minimal services that they do offer. Both airlines run point-to-point routes and neither interlines baggage.

2. By Spring 2017, 21 retailers (including Macy‘s, Sears, and The Limited) had announced the closure of over 3,500 stores affecting more than 50,000 jobs just in 2017. Several factors are impacting the retailing industry. For example, consumer behavior in developed countries is shifting from shopping trips to social experiences. In 2016 the amount of money spent in restaurants and bars for the first time surpassed that spent in grocery stores across the United States. Complicating matters for stores such as JCPenney, Macy‘s, and Nordstrom, which are largely based in malls, is a report that showed the United States had 1,200 malls and probably needs less than 900. On a per capita basis, the United States has 40 percent more shopping space than Canada and a remarkable 1,000 percent more than Germany.

2. Your team has been asked to consult for Simon Property Group (SPG on NYSE), one of the largest U.S. operators of shopping malls. The company wants to know how its mall space could be repurposed. What blue ocean ideas can your team develop to present to the executives at Simon? Consider the positives and negatives of typical mall sizes and locations in your answer. Stretch beyond traditional retailing for ideas to consider.

Students may have a variety of answers for this question and it is one likely to be answered in a variety of different ways across the country over the next five to ten years.

If you want to provide some food for thought to the students on this subject you can review ―The Mall of the Future Will Have No Stores‖ in The Wall Street Journal, June 12, 2017. The article has several examples of malls being used for major office space, logistics, and more open-air plazas and a park. A 24 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual more historical perspective with data updated from 2019 holiday sales is available in this WSJ article; ―The Department Store of the Future Will Look a Lot Like the Past.‖ For more background, see this article from The Atlantic, ―What in the World Is Causing the Retail Meltdown?‖ A WSJ article from the summer of 2019 is also useful; ―The Mall Meltdown Continues.‖

Related MiniCase Instructors may want to consider assigning and discussing the following MiniCase, which covers topics found in this chapter. Every MiniCase has assignable McGraw Hill Connect® case questions available.

MiniCase 6: Warby Parker‘s Blue Ocean Strategy

CHAPTER 7 Business Strategy: Innovation, Entrepreneurship, and Platforms Teacher Resource Chapter Contents

Teacher’s Resource Manual (TRM): Implementation Guide

ii

Learning Objectives

1

Textbook Chapter Contents

2

Chapter Teaching Resources

3

Overview of Chapter

5

Classroom Outline

7

Strategy Highlights

22

myStrategy

23

Discussion Questions

24

TRM Extra: Social/Ethical Questions

26 25

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Strategic Management, 6e Teacher‘s Resource Manual TRM Extra: Small Group Activities

26

Related MiniCase

27

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Strategic Management, 6e Teacher‘s Resource Manual

Teacher’s Resource Manual: Implementation Guide This Teacher‘s Resource Manual (TRM), supports delivery of your chosen curriculum and pedagogy.

This manual contains more than just guidance on how to cover concepts discussed in the sixth edition of Strategic Management; it also provides tips and best practices for how to utilize the full product suite (from the textbook to SmartBook® to Connect®). In addition, this manual includes a variety of supplemental teaching resources to enhance your ability to create an engaging learning experience for your students. Regardless of whether you teach in face-to-face traditional classrooms, blended (flipped) classrooms, online environments, or hybrid formats, you‘ll find everything you need in this improved resource.

The TRM follows the order of the textbook outline for each chapter and is divided into sections for each learning objective. Each section identifies the relevant PowerPoint slides from both the Lecture slides and the Supplemental Lecture slides (more on this below). This eases your preparation time for class as you can adjust slides as needed to ensure your students stay actively engaged throughout each session.

WHAT INSTRUCTOR RESOURCES ARE AVAILABLE? Within each section of the TRM you will find an assortment of examples, exercises, Connect® assignments, updates on the latest research, Strategy Smart Video discussions, and end-of-chapter discussion questions and exercises from which you can choose to enhance your students‘ learning and engagement.

Within the Connect® Library, you will find the following: In the Test Builder tab, you can create tests from the Test Bank that can be printed or administered within your LMS. In the Instructor Resources, you can access all of the following items:         

Teacher‘s Resource Manual PowerPoints (Accessible) Application-Based Activities‘ accompanying Teaching Notes Create™ Case Support MiniCase Support Sample Syllabi Video Library Capsim‘s Capstone Simulation and Capsim IM Image Bank (for your customized PowerPoints)

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Strategic Management, 6e Teacher‘s Resource Manual 43) This Teacher‘s Resource Manual is posted by chapter.

44) Two sets of ADA-accessible PowerPoints are available with each chapter: a. Lecture slides cover chapter concepts and exhibits. b. Supplemental Lecture slides cover: i. ii. iii. iv.

Chapter Cases Strategy Highlights Implications for Strategic Leaders Strategy Smart Video selections (not part of the book, but an additional resource found here) v. Key Terms

45) Test Bank questions, found in the Library tab entitled Test Builder, are posted by chapter. You will find a variety of question types within the test bank such as Matching, Ranking, Multiple Choice, Select-All-That-Apply, True/False, Short Answer, and Essays to test student mastery across Bloom‘s Taxonomy (i.e. Understand, Apply, and Analyze).

46) Create™ Case Support (all cases are available in Create™ and selected ones in HBP) a. A case matrix that identifies the industry sector covered by each case, as well as the primary and secondary chapter alignments b. One-page case abstract for quick overview of each case c. Case Teaching Notes for instructor use only d. Case Financials in Excel files for the exhibit data in the most popular cases e. Case Strategic Financial Analysis template f. Instructions on How to Download SEC Financial Data into Excel Spreadsheets 47) MiniCase Support (all MiniCases are located in Part Four of the book) a. MiniCase Teaching Notes comprising suggested answers to the MiniCase discussion questions. In some instances, they also provide specific additional article and video resources to accompany each MiniCase.

48) Video Resources, located in the Video Library, provide links to supplemental video resources to accompany both the MiniCases and full-length Create™ cases, as well as links to all of the assignable videos in Connect®.

49) A link to Capsim’s Capstone Simulation and a Capsim Instructor’s Manual correlated to Strategic Management is provided; this simulation allows students to apply their knowledge of key strategy concepts.

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Strategic Management, 6e Teacher‘s Resource Manual

HOW CAN SMARTBOOK® ENHANCE MY STUDENTS’ PERFORMANCE? SmartBook® is assignable through Connect®, McGraw Hill‘s online assignment and assessment system.

One of the first fully adaptive and individualized study tools designed for students, it creates a personalized learning experience, giving students the opportunity to practice and challenge their understanding of core strategy concepts. The reporting tools within SmartBook® show where students are struggling to understand specific concepts.

Typically, SmartBook® is assigned by module (chapter), and instructors can set which learning objectives to cover as well as the number of probes the student will see for each assignment. Instructors also set the number of points a SmartBook® module is worth in the course. Usually, applying a minimal number of points for completion of each module is enough to encourage students to read the chapter.

Many instructors assign these modules to be completed before the class or online session.

SmartBook® provides several diagnostic tools for instructors to gauge which concepts their students struggle to understand. Below is the set of adaptive assignment reports available in SmartBook®:      

Progress Overview: View student progress broken down by module.

Student Details: View student progress details plus completion level breakdown for each module.

Module Details: View information on how your class performed on each section of their assigned modules.

Practice Quiz: This gives you a quick overview of your students‘ quizzes results.

Missed Questions Metacognitive Skills

By selecting ―Module Details‖ the instructor finds the results for the students in the class overall. These details reveal where in the chapters students might be struggling. The module gives the chapter section, average time spent, average questions per student correct/total, and the percentage of correctness (number of assigned items). Information about the most challenging sections for students can help instructors refine the focus of the next classroom or online session.

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Strategic Management, 6e Teacher‘s Resource Manual For more detailed analysis, SmartBook® captures students‘ confidence in their competency using the ―Metacognitive Skills‖ report. Below (a recreation of the Metacognitive Skills report), we find the second student is confident and mostly correct (91% in the correct & aware column) while the first student ―doesn‘t know what they don‘t know‖ (39% in the far-right column).

STUDENT

Student 1 Student 2 Student 3 Student 4 Student 5 Student 6 Student 7 Student 8 Student 9 Student 10

CORRECT and AWARE 61% 91% 81% 83% 76% 66% 77% 91% 93% 70%

CORRECT and UNAWARE 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

INCORRECT INCORRECT and AWARE and UNAWARE 0% 39% 3% 5% 0% 19% 0% 17% 3% 21% 9% 25% 3% 20% 2% 7% 2% 5% 6% 25%

APPLICATION EXERCISES, QUIZZES, AND TEST BANK What resources are available at the book level?

Connect® offers a wealth of content for both students and instructors. Application Exercises require students to apply key concepts to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor. Before getting into chapter-level assignments, let‘s look at the book-level assignments available.

Four exercises are available for instructors to assign beyond the chapter materials. These are 1) MiniCase Case Analyses, 2) Case Exercises, 3) Financial Ratio Reviews, and 4) MyStrategy exercises.

The Financial Ratio Reviews and MyStrategy exercises comprise our new Student Primer in Connect.

25) To encourage analytical thinking, each MiniCase from Part Four of the book is also an assignable application exercise (MiniCase Case Analysis). Each MiniCase is followed by four to five multiple-choice questions that assess students‘ understanding of the key issues presented in the MiniCase.

26) Case Exercises focus on the key symptoms and influences of a problem a firm might be facing, followed by a series of questions that help students understand how the firm eventually achieves a solution to that problem (or asks students to suggest a solution).

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Strategic Management, 6e Teacher‘s Resource Manual 27) Financial Ratio Reviews give students the opportunity to further hone their financial analysis skills; review exercises cover each type of financial ratio (activity, leverage, liquidity, market and profitability).

28) MyStrategy exercises for each chapter provide direct personal applications of strategy concepts to careers and lives to help students internalize the content.

What resources are available for each chapter and how should I integrate them in my course?

Consider assigning one or two Application Exercises per chapter. They are built around chapter learning objectives, so the instructor can choose based on their focus for each specific chapter. Several types of application exercises are available in each chapter. The newest additions are our Animated Videos, comprising three- to four-minute videos on key concepts or concepts that tend to challenge students the most. Each animation is accompanied by three to four multiple-choice questions to check student attention and comprehension. Comprehensive Case Analyses and our new On-Location Video Cases feature firms and industries different than those discussed in the textbook and provide relevant, topical information for students. Finally, Click-and-Drag exercises help students actively demonstrate their understanding of the associated learning objectives. Application Exercises can be assigned as preparatory exercises due before class (this is especially good for flipped classrooms), or after class as concept comprehension checks. Applications Exercises will generally be assigned as homework or practice as part of the overall class grade. A general rule of thumb would be to make application exercises worth 5 to 10 points each since these require time and thought.

To find the Applications in Connect®, go to ―Add Assignment‖ and then select ―Question Bank.‖ Application Exercises are organized by chapter. Instructors have the option to select for one attempt only, but they may want to give students unlimited or multiple attempts on the first few assignments to give students a chance to learn and navigate the system. (As the course progresses, instructors may want to tighten up the time on task and reduce the number of attempts to complete each exercise).

Chapter quizzes and full chapter test banks are available for assignment, and like the Application Exercises, are organized by chapter. The value applied to each question should be relatively low because numerous questions are usually assigned for each chapter. As such, make these questions worth 1 or 2 points each. The feedback given to students is time-flexible. Selecting feedback to be displayed after the assignment due date helps to keep students from giving the correct answers to other students while the questions are still available. For this reason, it is suggested that no feedback to quizzes and test bank exams be made available until after the assignment is due.

When should I assign these digital components?

To fully utilize the power of the digital components, instructors will often assign the SmartBook® reading and adaptive learning probes before class meets. Application Exercises can be completed either before or after class; if they are completed before class, they can sometimes serve as good springboards for class discussions. The chapter quiz makes a good check on comprehension of the material and may work best if assigned after each class period. The test bank serves as a good resource for building midterm or final exams.

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Strategic Management, 6e Teacher‘s Resource Manual More detailed information on SmartBook® and Connect® is available through several resources at McGraw Hill. A good starting point is your local Learning Technology Representative, who can be found here: http://www.mheducation.com/highered/platforms/connect/features-educators.html

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Strategic Management, 6e Teacher‘s Resource Manual

COURSE PREPARATION Helpful Suggestions Regarding Assignment Policies: Connect® gives instructors a wide array of flexibility in making assignments and creating grading policies. Instructors may choose to: 

assign as many assignments as appropriate given the level and time commitment expected for the class,



determine point values for each question/application that works within the total course percentages,



make available multiple attempts per assignment with options of accepting the highest score or averaging all the attempts together (several attempts are particularly good for homework assignments),



deduct points for late assignment submissions (percentage deduction per hour/day/week/etc.) or create hard deadlines thus accepting no late submissions,



show feedback on application/questions immediately upon submission or at the time the assignment is due for the whole class, create new assignments or questions from scratch, or edited versions from a variety of provided resources.

Throughout the TRM for each chapter, we will integrate materials from the Lecture PowerPoint slides, Supplemental Lecture slides, Connect® Application Exercises, and MiniCases. This integration of resources will allow for a cohesive presentation of the relevant resources at your disposal, helping you to convey these topics effectively and efficiently to your students.

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Strategic Management, 6e Teacher‘s Resource Manual

CHAPTER 7 Learning Objectives LO 7-1 Outline the four-step innovation process from idea to imitation.

LO 7-2 Outline the four stages of industrial revolutions and derive implications for expected changes in the future.

LO 7-3 Apply strategic management concepts to entrepreneurship and innovation.

LO 7-4 Describe the competitive implications of different stages in the industry life cycle.

LO 7-5 Derive strategic implications of the crossing-the-chasm framework.

LO 7-6 Categorize different types of innovations in the markets-and-technology framework.

LO 7-7 Explain why and how platform businesses can outperform pipeline businesses.

In this chapter, we turn our attention to innovation. We start by defining innovation and reviewing how it can affect competition. We also examine how innovation plays out within the broader social and economic environment. Then, we look at the creation of new businesses with strategic or social entrepreneurship. We bring in a dynamic perspective by discussing how innovation changes over the industry life cycle and the challenges of ―crossing the chasm.‖ We review a typology of innovation, with an emphasis on disruptive innovations and their role in changing an industry‘s landscape. Changes driven by technologies related to the Internet and the increasing availability of broadband access are a pervasive theme of this chapter and are highlighted in a discussion of platform versus pipeline businesses. We close with a discussion of the practical implications of these ideas for strategists.

A chapter opening case on Netflix and two strategy highlights are included in the chapter for tangible applications of the theoretical frameworks discussed.

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Strategic Management, 6e Teacher‘s Resource Manual

Text Chapter Contents ChapterCase 7: Netflix: No Longer a Disruptor?

7.1 Competition Driven by Innovation (LO 7-1, LO 7-2) CONNECT® INTEGRATION Multiple Choice: Innovation Process 7.2 Strategic and Social Entrepreneurship (LO 7-3) CONNECT® INTEGRATION Case Analysis: Elon Musk: Serial Entrepreneur from Zip2 to Tesla and Beyond CONNECT® INTEGRATION Whiteboard Video: Industry Life Cycle 7.3 Innovation and the Industry Life Cycle (LO 7-4, LO 7-5) Strategy Highlight 7.1: Standards Battle: Which Automotive Technology Will Win? CONNECT® INTEGRATION Case Analysis: Innovation and the Industry Life Cycle—Apple and the Industries It Has Created CONNECT® INTEGRATION Click & Drag: Innovation and the Industry Life Cycle CONNECT® INTEGRATION Video Case: Impossible Foods 7.4 Types of Innovation (LO 7-6) CONNECT® INTEGRATION Multiple Choice: Types of Innovation CONNECT® INTEGRATION Whiteboard Video: Types of Innovation 2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual Strategy Highlight 7.2: How to Compete with Amazon.com? Easy: Use Shopify 7.5 Platform Strategy (LO 7-7) CONNECT® INTEGRATION Multiple Choice: Platform Strategy 7.6 Implications for Strategic Leaders ChapterCase 7 / Part II CONNECT® INTEGRATION Comprehension Case: Netflix: No Longer a Disruptor?

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Strategic Management, 6e Teacher‘s Resource Manual

Chapter Teaching Resources SECTION

Title

RESOURCE TYPE

CHAPTERCASE 7

Netflix: No Longer a Disruptor?

Netflix Founder Reed Hastings

Web Video (5 ½ mins)

Numbers are in: Uber, Lyft v. Rental Cars & Taxis

Web Article

Lessons from Yelp‘s Empirical Approach to Diversity

HBR article

Innovation Process

Connect® Multiple Choice

Elon Musk: Serial Entrepreneur from Zip2 to Tesla and Beyond

Connect® Case Analysis

Industry Life Cycle

Connect® Whiteboard Video

Innovation and the Industry Life Cycle: Apple and the Industries It Has Created

Connect® Case Analysis

Innovation and the Industry Life Cycle

Connect® Click & Drag Exercise

Impossible Foods

Connect® Video Case

Small Group Exercise: Record label sales

TRM Extra

The Great U.S.-China Tech Divide

WSJ Article

Ethical/Social Issues: Supplier issues

TRM Extra

Self-driving cars: Hype-filled decade ends on a sobering note

CNN article & video

7.1: Competition Driven by Innovation

7.2: Strategic and Social Entrepreneurship

7.3: Innovation and the Industry Life Cycle

Crossing the Chasm: History of Smartphones

Web Video (2 mins)

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Strategic Management, 6e Teacher‘s Resource Manual 7.4: Types of Innovation History of Wikipedia Types of Innovation

Web Video (3 mins) Connect® Whiteboard Video

Types of Innovation

Connect® Multiple Choice

Innovation

Connect® Multiple Choice

Small Group: Pipeline and platform business

TRM Extra

MiniCase 7: Platform Strategy: How PayPal Solved the Chicken-or-Egg Problem

Rothaermel Textbook

7.5: Platform Strategy

Platform Strategy

Connect® Multiple Choice

7.6: Implications for Strategic Leaders Netflix: No Longer a Disruptor?

Connect® Comprehension Case

Steve Jobs Commencement Address

Online Video (15 mins)

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Strategic Management, 6e Teacher‘s Resource Manual

Overview of the Chapter 7.1

Competition Driven by Innovation According to Joseph Schumpeter, competition is driven by the ―perennial gale of creative destruction.‖ One of the key issues is recognizing the accelerating speed on innovation. Exhibit 7.l illustrates by showing the length of time various technological advances have taken to reach 50% of the home is the U.S.—from 84 years for automobiles to 6 years for MP3 players. Broadly viewed, innovation describes the transformation from idea to imitation. Exhibit 7.2 shows the four phases of this transformation. Exhibit 7.3 displays how true innovation resides at the overlap of useful, novel, and implemented ideas. Finally, the section concludes with a discussion of how innovation plays out within the broader social and economic environment. Attention is given to different industrial revolutions and the types of innovation that have emerged. Exhibit 7.4 provides an overview of four waves of industrial revolutions and associated innovations.

7.2

Strategic and Social Entrepreneurship Entrepreneurship describes the process by which individuals and firms undertake economic risk to innovate. These agents do not only exploit new inventions, but also by introducing new products or services, new processes and/or new forms of organization. Strategic Entrepreneurship involves combining innovation with the tools of strategic managements.

Social entrepreneurship pursue innovation with their success lens with a ―triple-bottom-line‖ focus on profits, people and planet.

7.3

Innovation and the Industry Life Cycle One key to understanding innovation is found by flowing the various stages of the industry life cycle. As shown in Exhibit 7.5, these include: introduction, growth, shakeout, maturity and decline. One way to accomplish market acceptance in the introduction phase is by initiating and leveraging network effects—an example using the Apple iPhone is given in Exhibit 7.6. During the growth stage, multiple new technologies may be ―fighting‖ to achieve dominance— Schumpeterian economics provides insight into such decisions on historical innovations as electric power. Exhibit 7.7 illustrates the current competition in automotive technologies. As seen in Exhibit 7.8, during the shakeout stage, Process Innovation overtakes Product Innovation in driving the industry. The maturity stage is marked by an oligopoly with only a few large firm—the majority of demand has been satisfied in the previous stage. During the final stage—decline—the remaining firms seeks to harvest the last of the demand, frequently while innovators are seeking to break out to a new industry life cycle. Exhibit 7.9 shows the consumer side of an industry live cycle from Technology Enthusiasts and Early Adopters to Laggards.

7.4

Types of Innovation The type of innovation is critical both in shaping competitive dynamics and in formulating business strategy. Exhibit 7.12 casts the types of innovation using the axes of markets and technologies. Another segmentation looks at incremental vs. radical innovations. While radical changes may capture more press attention (e.g. iPhone announcement), incremental innovation is 6

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Strategic Management, 6e Teacher‘s Resource Manual more common (e.g., 4G to 5G cell service). Generally speaking, radical innovations are introduced by entrepreneurial ventures while incremental innovations come from established firms. These results tend to be guided by economic incentives, organization inertia, and the innovation ecosystem.

Another facet of innovation is found in the split between architectural innovation in which existing technologies are introduced to new markets and disruptive innovation where a new technology is employed to attack an existing market. Strategy Highlight 7.2 examines how Shopify has emerged as an alternative ecommerce solution for merchants to compete with Amazon. A final area of inquiry is how incumbents can use strategy to respond to disruptive innovation.

7.5

Platform Strategy The traditional view of a firm‘s business activities can be pictured as a linear ―pipeline‖ running from producers to consumers. An alternate, albeit more challenging, strategy involves the successful creation of a platform business model. Platforms are also called multi-sided markets.

Examples include Facebook, Alphabet and Amazon. Some key aspects of a platform include:   

Enabling value-creating interactions between external producers and consumers The goal of the platform is to facilitate matches among users.

The platform provides the infrastructure by which these interactions take place.

Exhibit 7.14 illustrates the relationships among players in a platform ecosystem. While there are significant benefits in a successful platform that allows it to gain and sustain a competitive advantage, the failure to manage negative network effects—as shown in Exhibits 7.15, 7.16 and 7.17—can result in the decline of both the platform and the players.

7.6

Implications for Strategic Leaders While innovation lays the foundation of a competitive advantage, continuous innovation is needed to sustain an advantage over time. Each diagonal pair on the technology/market axes have different strategic implications—incremental vs. radical and architectural vs. disruptive.

Additionally, moving from a pipeline to a platform implies three important shifts in strategy focus:   

From resource control to resource optimization From internal optimization to external interactions From customer value to ecosystem value

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Strategic Management, 6e Teacher‘s Resource Manual

Classroom Outline ChapterCase 7 Netflix: No Longer a Disruptor?

With millions of people stuck at home during the Covid pandemic, Netflix emerged as a winner. At their peak, Netflix had a market cap over $300 billion with a steadily growing subscriber base. By continuing to innovate in many different areas, Netflix was able to disrupt traditional TV broadcasting and gain a competitive advantage. Netflix started as an online shop renting DVDs delivered through the U.S. mail before ultimately rolling out a subscription model with unlimited rentals and no late fees. Netflix began streaming content over the internet in 2007, becoming a pioneer in the streaming video-on-demand wave. Coupled with wider availability and affordability of high-speed broadband internet connections and TVs with internet connectivity, Netflix took off.

Initially, old-line media executives dismissed Netflix as competitor. As time went on, these executives began to realize both the opportunity that streaming embodied and the threat that Netflix represented.

Old-line media companies began raising their licensing fees to prohibitively high levels or flat out refused to license content to Netflix. In response, Netflix announce it would begin creating original content and devoted significant resources towards this endeavour. Their content creation was guided by a deep analysis of viewer data, leading to the development of many highly successful series (e.g., House of Cards, The Crown, Ozark, Stranger Things, Tiger King, The Queen‟s Gambit, 13 Reasons Why, and Bridgerton). As of 2022, Netflix devotes a substantial amount of money ($18 billion) towards content creation. Despite a history of success and innovation, Netflix faces challenges. By the spring of 2022, Netflix has seen declining subscriber rates and a market cap that has decreased by 75% from its peak. Is Netflix no longer an innovative disruptor?

INSTRUCTOR SUPPLEMENT SLIDE 3

ChapterCase 7 Part II The closing ChapterCase provides more information on Netflix‘s current challenges. These challenges include slowing subscriber growth and subscriber loss, shared accounts, a saturated streaming market, and intensified competition.

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ChapterCase 4 Discussion Questions 1.

How did Netflix use innovation in its business strategy to gain and sustain a competitive advantage? What role did strategy, technology, and business models play? Explain in detail.

Netflix changed its business model from a disruptive method of DVD delivery to the technology innovation of video streaming. Once this shift was accomplished, Netflix attempted to convert from a pipeline to a platform—which adds the challenges of content creation to those of delivery. From a technology focus, as high-speed internet became more affordable and more accessible, Netflix‘s streaming platform became more popular. Adding in the influx of TVs and devices that are internetcapable, and it became easier for more people to ―adopt‖ a Netflix subscription. One of the challenges that Netflix is currently facing is the maturing of its industry. As such, this may be a good time to bring up material covered in Chapter 3—namely the discussion of industry structure (perfect competition  monopoly). The shift in industry structure may also form the basis of a discussion and response to this question.

2.

Why is competition in internet streaming services heating up? Who is jumping into the fray, and why? How do these companies differ? Going forward, what results do you expect from this intensifying competition?

Netflix is now competing with Apple, Disney +, Hulu, YouTube and others to deliver popular and original content for video without the traditional tie to a cable system. The ecosystem of streaming services is moving from the ―growth‖ to ―shakeout‖ phase of the industry lifecycle—many consumers are subscribing to multiple services in order to span the sources of content—one result may be a ―winner‖ of the platform competition that successfully manages the content interactions to provide consumers with the suite of viewing options that they desire. There may also be choice fatigue from customers. While streaming platforms have provided an option that freed many subscribers from cable TV, there are now so many choices that customers may be overwhelmed with their options.

Additionally, unlike cable with its large bundle of programming, streaming services are easily cancelled as income or other environmental shifts happen. For example, inflation is causing many households to reevaluate their spending and their budgets, and streaming services may be easily cancelled as a result.

With Netflix continually raising prices, they may find themselves first on the chopping block.

3.

Do you think creating an ad-supported, lower-cost tier is a smart strategic move for Netflix? Would you pay $5 a month for an ad-supported Netflix subscription? Why or why not?

9

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Strategic Management, 6e Teacher‘s Resource Manual

This question is likely to receive a variety of responses. On one hand, offering a lower-cost tier may lead to increased accessibility for different customers. This may be a viable option in international markets.

However, one thing that differentiated Netflix from its competitors (like Hulu) is continuous, ad-free streaming. This may be too little, too late to retain its current subscribers (who would be stepping into a lower-tier of service). There may also be a generational difference between ads vs. non-ads. It may be interesting to query students on their preferences and expectations. Additionally, you may have students suggest alternatives to ad-supported Netflix subscriptions or discuss other options that Netflix is pursuing (like airing live sporting events).

4.

Gaming is one strategic initiative that Netflix is pursuing. Do you see Netflix as being a destination for gamers? Why or why not?

It may be interesting to poll the students to see how many of them know about Netflix‘s gaming options.

There may be a few gamers out there that will be aware of this service, but it is one of their least known offerings. Their gaming selection is actually considered to be quite good, but little is being done to spread the word (check out this article: ―Netflix Has Some Great Games But Nobody's Playing Them‖).

One thing to consider is that entering into the gaming industry will put Netflix into competition with gaming companies that already have a loyal fan base and reputation. Just like the streaming industry, gaming also has a market saturation problem. Considering services like Steam, Epic Games, Sony‘s Playstation Plus, Nintendo, Activision, and Blizzard, gamers are also faced with an onslaught of choices but limited time.

5.

In addition to cracking down on password sharing, developing new original content, and moving into gaming, which other strategic initiatives might help Netflix jump-start its innovation engine and regain its competitive advantage? Explain.

This is a difficult question to answer, and students may be at a loss of where to start. One way to start the discussion is to chat about what Netflix‘s competitors are doing. Disney may be a great example.

Netflix may want to get into the business of experiences like Disney‘s theme parks. Netflix possesses some original content that could lend itself to being converted into a ―real-world experience.‖ For example, Stranger Things could be the foundation of a ―retro‖ experience and an exploration of the Upside Down. Publishing and other media-related endeavors could be another opportunity for Netflix.

Finally, podcasts or audio originals (via Audible) could be another area of exploration.

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STRATEGY SMART VIDEO INSTRUCTOR SUPPLEMENT SLIDE 15 This slide links to a five-minute video of an interview with Netflix founder Reed Hastings with some insights as to what he would do differently if given the chance.

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7.1 COMPETITION DRIVEN BY INNOVATION LO 7-1 Outline the four-step innovation process from idea to imitation.

LECTURE SLIDES 3–7 EXAMPLES There are many examples of creative destruction that you might offer to supplement those in the text.

One that will resonate with students is the rise of ride-hailing firms and the declining revenues in both rental cars and traditional taxi services. An example article with some 2018 statistics on these changes is provided by WolfStreet here. Other examples to consider: kiosks have displaced cashiers in fast food restaurants and some stores, e-books and e-mags are replacing paper books and magazines, tablets are replacing PCs, and K-cup-style machines are replacing standard coffee pots. Biologics are displacing chemical drugs in that established pharmaceutical companies, like Merck and Pfizer, brought major new drugs to market in the past, using a chemical-based drug discovery and development paradigm.

Technology is also infiltrating the beauty industry. A quick search will showcase a wide variety of technology related to skin care (e.g., laser skin treatments, mist/vapor treatment).

LO 7-2 Outline the four stages of industrial revolutions and derive implications for expected changes in the future.

Attention is given to different industrial revolutions and the types of innovation that have emerged.

Exhibit 7.4 provides an overview of four waves of industrial revolutions and associated innovations.

DISCUSSION TOPICS Discussion of the innovation process shown in Exhibit 7.2 is worth spending a few moments on in class.

Many students will come into the classroom confused over the difference between inventions and innovations. It is important to set the framework here at the start of the chapter for a better understanding of the concepts to follow.

Apple disrupted the phone market with the first iPhone and created the tablet market with the first iPad. Why does it still hold a commanding share of the tablet market, while Android makers lead in cell phones? Students will have a variety of ideas on this topic, but the goal will be to get them to build from the theoretical drivers of first-mover advantage, rather than intuitive ideas as consumers. Apple launched the tablet with great content; it designed the iPad and negotiated supply contracts that gave it a cost leadership position for that level of features and priced the product aggressively.

Innovation rates benefit from gender diversity on new product development (NPD) teams and yet the number of women entering STEM fields has declined steeply over the last few decades. Tell students to imagine that they ran a large Silicon Valley tech firm or a Boston biotech firm and discuss how they might attract and retain more female engineers, programmers, and scientists to their NPD teams and how they might improve the gender diversity of the future applicant pool. (Suggested reading to prepare for 12 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual this discussion: Lessons from Yelp‘s Empirical Approach to Diversity, Harvard Business Review, Recruiting and Retaining More Women in Technology Organizations,‖ McKinsey Quarterly, and ―Wanted: More Women in Technology,‖ McKinsey Quarterly. Alternatively, you can show one or more of the video clips from the interviews described in these articles in class, or post links to these videos in an online class as preparation for a discussion board assignment.

Finally, innovation does not happen in a vacuum. The last focus of this section is a discussion of how innovation is connected to a broader social and environmental context. Students may be interested in discussing what the next big technology changes may be and what innovations we can expect to see moving forward.

INTEGRATION Multiple Choice: Innovation Process This activity will help students to visualize how the innovation process evolves and how companies can introduce change that requires a response from their competition.



Difficulty: Medium  Blooms: Apply

7.2 STRATEGIC AND SOCIAL ENTREPRENEURSHIP LO 7-3 Apply strategic management concepts to entrepreneurship and innovation.

LECTURE SLIDES 8–10 The textbook describes a few serial entrepreneurs, as well as a Connect® exercise that focuses on serial entrepreneur Elon Musk. However, as firms mature, they often need different skill sets in their CEO than the entrepreneurial expertise of the founder. Studies find that fewer than half of the firms that go public still have a founder as CEO. One that did retain its founder as CEO, however, is Tesla under the leadership of CEO Elon Musk. Find out more about his background and prior businesses in the Connect® activity noted below.

INTEGRATION Case Analysis: Elon Musk: Serial Entrepreneur from Zip2 to Tesla and Beyond This case analysis extends the example of successful entrepreneur Elon Musk from the textbook. The case covers Musk‘s diversity of startup experiences, including the social dimensions which are often 13 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual prominent in his vision for the business. Students will read the case and then answer the four questions following it.

Follow-Up Activity: The instructor can expand on the concepts in this case analysis by comparing other example entrepreneurs discussed in the textbook (Jeni Bauer, Jeff Bezos, Dr. Dre, and Jimmie Wales) with Reed Hastings from the ChapterCase opener. What are the major differences in how these individuals have approached entrepreneurship? How have these differences impacted the organizations they have founded? 

Difficulty: Medium  Blooms: Apply

DISCUSSION TOPICS Beyond starting and running new businesses, entrepreneurs are change agents who transform innovation into reality. Apple Inc. is known as one of the world‘s most innovative companies, and its co-founder Steve Jobs was credited with Apple‘s most important breakthrough innovations. Steve Jobs also founded Pixar, one of the most successful film studios of all time. Leveraging 3D computer animation, Pixar has created blockbuster hits such as Toy Story 1, 2, and 3, A Bug‘s Life, Monsters Inc., Finding Nemo, and The Incredibles, among others. Steve Jobs was clearly an entrepreneur extraordinaire, and he created continuous innovation in his quest to create value through new products or services. Students may have read a biography on Steve Jobs or seen the movie about him. Invite a discussion on his traits and behaviors that might have contributed to the outstanding record of innovation in these two companies he led.

CLASS EXERCISES To illustrate how difficult it is for firms to be innovative in their thinking when they have a great deal of experience in an area, I bring 10 items to class and arrange them in order on a table. The only requirement for these items is that they be varied (banana, shoe, pencil, book, coffee cup, chair, etc.).

Then I tell students that they are being asked to develop a new name for each of these items and write it on a piece of paper. I hold up each item in order, then I add an eighth item—a verb—by jumping or skipping. I give them only about 2–3 seconds between showing each item, then I go through them a second time. At the end, I ask them to score themselves, giving themselves zero points if their new name is the same as the old name in a different language than English, 1 point if the name is a noun in the same family (for example, apple for banana), 2 points if the name is a noun in an unrelated family (for example chair for banana), 3 points if the new name is not the same part of speech (happy for banana), and 4 points if the new name is not an existing word. Then I ask students to raise their hands if they scored more than 10, 20, or 30. (I have only had one student over the years who got all 4s—a manager for the Girl Scouts.) I use this exercise to initiate a discussion of how challenging innovation is because organizations often limit it with risk aversion, incentives for incremental innovation, discouragement of experimentation, and focus on short-term profit. However, an equally big challenge for firms is that even when they do not limit employees‘ innovation, the employees limit themselves by imagining nonexistent constraints and the inability to break from their own mental models. As an option for extending the exercise, you can follow this discussion with a second phase in which you ask students to form small teams and assume that they are the managers of an R&D team. What processes, culture, or incentives 14 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual might they use to facilitate higher levels of creativity in their team? This humorous Onion video, ―CEO Has Special Knack for Recognizing Great Ideas and Ruining Them,‖ would be a good jumping off point for such a discussion. It describes the boss who excelled at killing good ideas.

7.3 INNOVATION AND THE INDUSTRY LIFE CYCLE LO 7-4 Describe the competitive implications of different stages in the industry life cycle.

LECTURE SLIDES 11–19 Apple‘s ability to leverage network effects is shown in Exhibit 7.6. Most students will immediately recognize that they do indeed often value the apps more than the actual phone features. Yet so often they have not thought through the strategic implications of this. Link back to Porter‘s five forces and recall the idea of switching costs. The access to unique apps not only can drive consumer value and therefore volumes, but it also increases the ―stickiness‖ of customers. If a customer is comfortable with the Apple app store products and the interface with iTunes to purchase and organize their apps, they are far less likely to explore Android (from Google) or Windows 10 (from Microsoft) even if these latter firms introduce a really attractive hardware/software phone package or features.

INTEGRATION Whiteboard Video: Industry Life Cycle This video describes how competition within an industry evolves over time. Strategy needs to change as the industry changes over time. . 

Difficulty: Medium  Blooms: Apply

INTEGRATION Case Analysis: Innovation and Industry Life Cycle—Apple and the Industries It Has Created This activity reviews the role of competitive behavior throughout the industry life cycle. It reinforces the competitive implications of different stages in the industry life cycle. There are five distinct stages in industry life cycle; each stage has strategic and competitive implications for a firm.

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Strategic Management, 6e Teacher‘s Resource Manual Follow-Up Activity: The industry life cycle is closely related to the next section of the textbook on crossing the chasm. The textbook adroitly uses Netflix as an example tying together these two frameworks. See the Discussion Question later in this TRM chapter for the students to use these concepts for a different industry. This could be the basis for some small group discussions, and the instructor may want to assign industries or in some other way assure a variety of chosen industries across the classroom. 

Difficulty: Medium  Blooms: Apply

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity around a music record label with declining sales.

EXAMPLES Standards as discussed in the growth stage and Strategy Highlight 7.1, are extremely important because they represent a common set of engineering features and design choices. Standards reduce industry uncertainty and confusion and ensure product quality, performance, and safety. As standards become dominant, the competitive nature of an industry intensifies. Firms begin to reap economies of scale and learning, prices begin to fall, and distribution channels are expanded. As shown in Exhibit 7.7, the basis of competition transitions more toward process innovation (lean manufacturing, Six Sigma, and others) instead of product innovation. Though the emergence of a dominant design fosters the development of complementary assets, firms sometimes choose not to support certain new standards or applications. As an example, the QWERTY keyboard, named for the sequence of the first six letters on the upper-left row, was introduced in the 1870s as a way to slow typists in order to avoid jamming the type bars in mechanical typewriters. While generally considered an inefficient arrangement of the most frequently used letters, the QWERTY keyboard remains the standard today, but not for lack of alternatives. In the 1930s, August Dvorak, designed and patented an alternative keyboard (DSK) intended to speed up typing by locating the most frequently used letters in the center row. But given the cost people had invested in learning the QWERTY keyboard, the DSK did not catch on. Today, however, every personal computer comes with an optional DSK setting that requires only a minor software modification. Even though most people have never heard about it, the DSK has a passionate core of devotees. They were quite surprised to learn that when smartphones with virtual keyboards, like the iPhone and the BlackBerry Storm, and the media tablet iPad were introduced, they came only with the traditional QWERTY keyboard layout. A software developer created an iPhone app to allow users to add the Dvorak layout. But since it is not an ―approved Apple App,‖ users must hack into their systems to install the unofficial program. (Caution: Such ―jail breaking‖ voids the iPhone‘s warranty.) This example shows how hard it can be to overthrow entrenched standards, even when they are inferior, and the cost of alternative options is quite low

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Strategy Highlight 7.1 Which Automotive Technology Will Win? Click here for a summary of the Strategy Highlight. This is a useful example of a current standards question about the future of the automotive industry. Are we near a point when the standard of gasolinepowered cars will yield to a new standard propulsion such as electric motors or hydrogen?

The issue of standards is not just limited to a century old story about the development of the keyboard or the propulsion system of automobiles. In the 21st century there are new tensions about technology adaption and supremacy which will resonate for decades to come. This WSJ article in early 2020 provides some previews of the issues surrounding technology development in a globally connected world; The Great U.S.-China Tech Divide.

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for information on an extended discussion about the ethical issues in dealing with a supplier.

LO 7-5 Derive strategic implications of the crossing-the-chasm framework.

CLASS EXERCISES Ask student teams to draw a projected industry life cycle for self-driving cars. It may be helpful background to review the five levels of autonomous vehicles as defined by the Society of Automotive Engineers first set up in 2014; HERE is a summary article from CNET. When they have had a few minutes to discuss this, guide a group discussion on what uncertainties auto makers are experiencing in this area. This discussion should lead to an identification of PESTEL (Chapter 3) factors, such as technology developments, societal attitudes, legal barriers, and consumer behaviors that are highly uncertain. How might the firms reduce their risk? Students may suggest alliances or staged investments.

You can extend that discussion further in the future by talking about what it would take for autonomous driving cars to cross the chasm. (See ―Self-driving cars: Hype-filled decade ends on a sobering note‖ from CNN).

STRATEGY SMART VIDEO INSTRUCTOR SUPPLEMENT SLIDE 13 This slide links to a two-minute video illustrates the concept of ―crossing the chasm‖ by offering examples of smartphones that succeeded and did not succeed in capturing the mass market.

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Strategic Management, 6e Teacher‘s Resource Manual STRATEGY SMART VIDEO EXAMPLES Social network sites have followed a pattern similar to that illustrated in Exhibit 7.9. Friendster was unable to cross the chasm. Myspace was successful with the early majority, but only Facebook went on to succeed with the late majority and laggards.

3D printers (a key component of a broader field of ‗additive manufacturing‘) had great success with early adopters, but the leading products are having trouble crossing the chasm. What is causing this stall in the industry life cycle? Technology barriers that are preventing the development of machines that are fast enough and easy enough for the mass market in either industrial or consumer customers. Learning curves and economies of scale have not brought the costs down yet to a point attractive to mass market consumers. (See ― The State of 3D Printing‖ from Forbes and―3D Printer Firms Fall Flat as Buyers Wait for New Models,‖ from The Wall Street Journal). A documentary on Netflix called Print the Legend is also excellent. It is focused on the 3D printing revolution and delves into the growth of the industry including two up-and-coming companies competing with more established companies.

INTEGRATION Click & Drag: Innovation and the Industry Life Cycle This exercise shows students how both supply and demand sides of the market change as the industry ages. Each stage requires unique competencies for a company and an ability to satisfy the needs of unique customer groups that also change during each stage. . 

Difficulty: Medium  Blooms: Apply

INTEGRATION Video Case: Impossible Foods This video shows how Impossible Foods has innovated in the food space to provide an environmentally friendly meat alternative. Hear about their path to innovate in their pursuit of profits and saving the planet. 

Difficulty: Medium  Blooms: Apply

7.4 TYPES OF INNOVATION LO 7-6 Categorize different types of innovations in the markets-and-technology framework.

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Strategic Management, 6e Teacher‘s Resource Manual LECTURE SLIDES 27–32 EXAMPLES Below are some additional examples beyond those discussed in the text that can be used to bring out the elements of technology and markets for the framework in Exhibit 7.12.

Radical Innovation:     

iPad iPhone Coffee in K-cups Space Shuttle Bluetooth connection

Incremental innovation: 

The many flavors of Oreos



Diet Decaf Cherry Coke



Tide with bleach, fabric softener, improved stain removing power, etc.



New sizes of Samsung Galaxy products,



―Spinner‖ suitcases

Architectural innovation: 



We find many students are not familiar with the older ―furniture-sized‖ photocopy machines that were heavily centralized in large offices and required nearly constant maintenance to keep running. This same shift in copiers can also be seen with computer printers as well.

The global positioning system (GPS) technology and satellite infrastructure was originally developed for military applications. After several years in operation there, the government opened up the satellite feeds for commercial uses. Today, running on those existing technologies, we have a variety of new and inexpensive consumer products incorporating GPS technology.

Disruptive innovation:    

VoIP (Skype is one example) is challenging the traditional landline technology.

Propeller airplanes to supersonic jets Branch-based brick-and-motor banking to online banking (and the same for stock brokerage) Large (tube-based) computer and TV screens to high-definition flat-panel displays

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Strategic Management, 6e Teacher‘s Resource Manual 

 



Data storage products advanced from the floppy disk to the hard disk to the CD, then to the ZIP drive, and now to flash drives. Each new memory device invaded the market from the bottom up and performance improved over time.

The vinyl record player to the cassette tape to the CD, and then to digital MP3 players like the iPod The emergence of electric arc furnaces, for example, was a disruptive innovation that allowed so-called mini-mills like Nucor and Chaparral to produce steel in small batches and at lower cost compared with fully integrated steel mills such as U.S. Steel or Bethlehem Steel. Initially, though, the quality of steel produced by mini-mills was poor and could compete only in the lowest tier of the market: steel used to reinforce construction concrete (rebar steel). Once the mini-mills entered segment 1 of the steel market, the integrated mills could no longer be cost-competitive given their high fixed cost; the incumbents happily ceded segment 1 of the market to the new entrants because it was a low-margin business to begin with. However, invading segment 1 of a market creates a beachhead for a new technology, which the new entrant uses to gain more market expertise, build economies of scale, lower cost, and further improve quality.

A non-U.S. example of disruptive innovation is Japanese seafood sales and distribution. Ask your supply chain management majors to lead a discussion on why the industry is ripe for a disruption and whether they think Hachimenroppi will be successful in disrupting the industry incumbents, challenging them to identify both pros and cons (see ―Startups Upend Japan‘s Seafood Industry,‖ The Wall Street Journal).

Strategy Highlight 7.2 How to Compete with Amazon.com? Easy: Use Shopify Click here for a summary of the Strategy Highlight covering an emerging competitor to Amazon.

INTEGRATION Whiteboard Video: Types of Innovation Innovation helps firms grow or simply maintain their existing positions. Understanding the forms that innovation takes will help you drive growth within your firm or respond to the innovations that are created at other firms.

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Difficulty: Medium  Blooms: Apply

INTEGRATION Multiple Choice: Types of Innovation This activity helps students connect various types of innovation to market and technology opportunities.

Students will answer three multiple choice questions after this interactive labeling is completed.

Follow-Up Activity: The instructor can expand on this topic by drawing the 2X2 innovation framework on the board and asking students to provide products and services that would fit in each of the four categories. While this seems simple, we have found students will disagree about the placement of several well-known products and the class discussion can help bring out the need to understand the industry perspective used for analysis for optimal placement into the framework. See the Discussion Questions at the end of this file that also address this subject. 

Difficulty: Medium  Blooms: Apply

7.5 PLATFORM STRATEGY LECTURE SLIDES 33–38 LO 7-7 Explain why and how platform businesses can outperform pipeline businesses.

When the world‘s top five most valuable firms are operating in a platform business model it says we need to understand this digital era of running companies. These platforms or multi-sided markets have several dimensions they can work within as illustrated in Exhibit 7.13.

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity for some team discussion on pipeline and platform businesses.

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Strategic Management, 6e Teacher‘s Resource Manual EXAMPLES Students, particularly in the United States, may not be familiar with the Chinese based firm Alibaba. The firm is likely to continue growing its global footprint in several different directions. As part of its effort to expand into new avenues, Alibaba has announced it is opening new research & development (R&D) labs around the world including one in the San Francisco area and another near Seattle. (―Alibaba Sizes Up Facebook, Amazon with R&D Splurge,‖ The Wall Street Journal). It may be interesting for students to run a comparison of the multi-sided markets that Alibaba and Amazon are both operating with and make some judgements on the trajectory for each of their businesses.

INTEGRATION Multiple Choice: Platform Strategy This activity helps students connect the platform versus the pipeline business models. This is an important concept for students given the increasing importance of entire ecosystems in several surprising industries such as media and ride hailing services. 

Difficulty: Medium  Blooms: Apply

7.6 IMPLICATIONS FOR STRATEGIC LEADERS INSTRUCTOR SUPPLEMENT SLIDE 8 STRATEGY SMART VIDEO INSTRUCTOR SUPPLEMENT SLIDE 14 This slide has a link to a 15-minute video of a touching and many think, profound commencement address by Steve Jobs. Mr. Jobs is widely regarded as one of the most innovative entrepreneurs and leaders in many decades for his work and Apple, Next, and Pixar.

CLASS DISCUSSION Have the students watch Mr. Steve Jobs‘s classic Stanford commencement address and discuss his key points. Though Steve would live another six years after this speech, his health had been challenging before this speech. His reflections here have garnered more than 33 million views.

INTEGRATION Comprehension Case: ChapterCase—Netflix: No Longer a Disruptor?

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Strategic Management, 6e Teacher‘s Resource Manual Here, we provide both Parts 1 and 2 of this case, accompanied by short-answer questions that students can complete and submit. Due to the nature of these open-ended questions, they require manual grading. 

Difficulty: Medium  Blooms: Apply

Strategy Highlights Strategy Highlight 7.1 Which Automotive Technology Will Win? This strategy highlight looks at the current firestorm among traditional internal combustion engines, hybrid cars and all-electric vehicles. Even among ―all-electric‖ vehicles there is a competition between ―plug-in‖ hybrids and alternatives such as ―fuel cell‖ vehicles. While this competition can be viewed through the classic ―Shumperterian lens‖ of creative destruction—the question of which technology will arise to dominance has a few subsidiary questions. There is an interplay between the engine technology and the support infrastructure that must be created. What companies could ―win‖ in regard to a national network of ―charging stations‖ as compared with ―fuel cell‖ replacements similar to propane tanks used for back yard grills?

Strategy Highlight 7.2 How to Compete with Amazon.com? Easy: Use Shopify Amazon is dominant in ecommerce transactions with over 50% of the market. Sellers using Amazon‘s retail platform have complained of Amazon poaching data to offer competing products at a discount and favoring its own products in searches on the site. Given Amazon‘s control of the market, these sellers didn‘t have many other options for a retail platform. This Strategy Highlight focuses on Amazon‘s competitor: Shopify. While Amazon‘s focus is on the customer, Shopify focuses on making merchants happy. They work to create a one-stop solution for merchants to create a professional online storefront, register a domain name, and manage inventory, orders, and payments. Using partnerships with Google and Meta, Shopify was able to expand its reach, and these relationships were strengthened during the COVID pandemic. Despite some market value decline, Shopify is a healthy company with one in three business conducting ecommerce via their services.

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Strategic Management, 6e Teacher‘s Resource Manual

my Strategy Here, we encourage the student to take what they have learned about entrepreneurial companies and apply it to his/her personal career. Encourage students to spend a few minutes looking at themselves to discover their own desire to work in innovative environments.

1.

Thinking about today‘s business climate, would you say that now is a good time to start a business? Why or why not?

Interest rates, real estate leases, and an abundance of qualified applicants for many jobs are all favorable factors. Reduced bank lending for small businesses is a negative. Availability of great human capital is high when jobs are scarce. Also, with recent low interest rates, investors may be more willing to accept the risks of investing in startups since other avenues are producing very small returns. Inflation and supply chain issues may make it more difficult for small businesses and startups to succeed.

Additionally, the cost of capital is much higher with rising interest rates.

2.

Do you see higher education as a benefit or detriment to becoming a successful entrepreneur? Why? Students might have varying opinions on this, although they are likely to view higher education as useful since they made the choice to pursue a degree. You might point out the importance of business classes in providing the knowledge to develop an effective business plan and the finance and accounting courses helping to avoid the biggest risk of failure for small businesses—failure to manage cash flow.

3.

Explain how you would apply the strategic management framework to enhance your startup‘s chances to gain and sustain a competitive advantage.

The AFI framework can be useful in many different stages of a business. The role of a vision or a meaningful ―why‖ for the startup proves to be particularly important to attract a workforce of highly motivated and well aligned associates. Business level strategies are vital for a startup to access how to approach the market and win customers. In this chapter the ideas of innovation can be directly applied in many startup situations.

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Strategic Management, 6e Teacher‘s Resource Manual

Discussion Questions 1. Patents are discussed as part of the invention phase of the innovation process in Exhibit 7.2. Describe the trade-offs that are made when a firm decides to patent its business processes or software. Is this same trade-off applicable to tangible hardware products made by a firm?

As the text notes, patents can help create entry barriers and slow down imitators in some product categories. However, the advantages are balanced by the requirement to fully disclose often proprietary information in order to file a valid patent claim. Thus, there are several different tradeoffs in softer business advantages such as algorithms and business models compared to more traditional hardware.

2. Select an industry and consider how the industry life cycle has affected business strategy for the firms in that industry over time. Detail your answer based on each stage: introduction, growth, shakeout, maturity, and decline.

Refer the students to the comprehensive overview of industry life cycle in Exhibit 7.11. The industry life cycle significantly affects a firm‘s business strategy. Strategies for each phase are discussed below: Introduction—In this phase, a firm‘s objective is to achieve market acceptance and seed future growth.

Firms typically invest heavily in R&D and some in marketing, emphasizing unique product features and performance (differentiation). Network effects are leveraged to propel a firm to the next stage.

Growth —In this phase, a firm‘s objective is to stake out a strong strategic position. This is done through a shift toward manufacturing and marketing capabilities, with an R&D emphasis on process innovation instead of product innovation. Some firms continue to follow a differentiation strategy, but others determine that a cost-leadership strategy is imperative.

Maturity —Growth primarily comes from the late majority and the firm‘s focus should be on maintaining a strong strategic position. Improved manufacturing and process engineering capabilities drive down the costs, which leads to intense price competitions. Typically, a firm uses either a costleadership or an integration strategy.

Decline—As the size of the market contracts, firms consider four options in this stage: exit, harvest, maintain, or consolidate. Firms can claim market share through a cost-leadership, a differentiation, or an integration strategy.

3. Describe a firm you think has been highly innovative. Which of the four types of innovation—radical, incremental, disruptive, or architectural—did it use? Did the firm use different types over time?

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Strategic Management, 6e Teacher‘s Resource Manual When describing the chosen firm, the key principle is that the student understands the differences between the four types of innovation. A sample company is Samsung, who has been innovative in the TV industry and has utilized several of these innovation types. Each year, Samsung makes incremental innovation improvements to its LED TV line: improved contrast ratios, more HDMI inputs, thinner screens, and so on. Samsung also created two new technologies in this market: a bendable OLED screen and the 3D TV. Both of these are classified as disruptive innovations. This is just one example as the number of innovative firms is limitless.

4. While many new firms and industries are using a platform strategy, there are downsides to this approach. Explain two ways in which multi-sided markets may be a disadvantage for firms entering new markets.

Several ideas can be offered for this question. Below are two we often bring up in class discussions.

1) There is a balance needed between the multiple sides of the market for platforms to really be able to scale. Apple must have developers willing to keep creating and updating desirable Apple mobile apps despite their decreasing global market share against Android. Lyft must strike a balance between enough drivers available for customers to be able to get consistent service versus the driver‘s desire to stay busy so they can make the income needed to keep driving for the firm.

2) There is an infrastructure needed to create a platform that is more extensive than most single sided markets. Also, in the digital realm, a level of trust must be created for broad adoption of platforms (to cross the chasm). Passengers may not ride in an Uber car if they believe the drivers are not properly vetted for safe driving records. Owners will not put their property on an Airbnb listing if they don‘t think the customers using the platform will typically take care of the property they rent.

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Strategic Management, 6e Teacher‘s Resource Manual

TRM Extra: Ethical/Social Questions 1.

You are a co-founder of a start-up firm making electronic sensors. After a year of sales, your business is not growing rapidly, but you have some steady customers keeping the business afloat. A major supplier has informed you it can no longer supply your firm because it is moving to serve large customers only, and your volume does not qualify. Through you have no current orders to support an increased commitment to this supplier, you do have a new version of your sensor coming out that you hope will increase the purchase volume by over 75 percent and qualify you for continued supply. This supplier is important to your plans. What do you do?

This can be a common issue for a start-up firm, and students will have a variety of opinions on what the firm should do. The co-founder could consider a cost-benefit analysis when evaluating this problem. If the firm can identify another supplier(s) who will produce the sensors and mitigate the risk of losing the current supplier, then this should be considered an option. Likewise, the co-founder could elect to continue with the current supplier, but just increase the purchase volume to account for the anticipated sales. In this instance, the startup can be confident that the sensor quality is maintained. Additionally, they could negotiate a new sensor price, with the current supplier assuming economies of scale will be achieved during production. Would the startup go ahead and purchase the increased quantity even if its sales don‘t justify it, thus creating an inventory problem? Students will come up with other factors to consider, with the general theme that this is not an easy decision to make.

TRM Extra: Small Group Activities 1.

Your group works for Warner Music Group (www.wmg.com), a large music record label whose sales are declining largely due to digital piracy. Your supervisor assigns you the task of developing a strategy for improving this situation.

1a.

What are the key issues you must grapple with to improve the position of Warner Music Group (WMG)?

Students will have a variety of answers to this question. It is difficult to prevent the piracy of music, especially in this digital age. Thus, WMG should determine a strategy that capitalizes upon this growing digital trend. WMG can partner (or buy out) with several net-labels and online music stores (iTunes) to claim some of the lost revenue from piracy. Additionally, to further improve their position, WMG should look to draft deals with artists that give the label additional control and potential for revenue from tours, merchandising, and endorsements.

1b. In what phase of the life cycle is the record-label industry?

The record-label industry is in the decline stage. The increase in file sharing and drop in music sales have required record labels to reconsider their strategies.

1c. How does this life cycle phase affect the types of innovation that should be considered to help WMG be successful?

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Strategic Management, 6e Teacher‘s Resource Manual The decline stage of the life cycle suggests four strategic options: exit, harvest, maintain, or consolidate.

None of these strategies recommend a firm should invest heavily in future innovation. However, to extend the ―long tail‖ the record-label industry could identify a disruptive innovation that would aid in the collection of revenue from legitimate and illegitimate music sales.

2.

The text discusses the pros and cons of pipeline businesses and platform businesses. Several examples of new platform businesses are mentioned (Uber, Airbnb, Facebook, and Alibaba, for example). Yet it is noted that these multi-sided markets have actually been around much longer.

2a. What are some of the biggest differences in the historical way to view platform markets and the more modern business incarnation?

Traditional city marketplaces and other multi-sided markets are places where buyers and sellers meet under a set of rules and conduct business. Today with digital platforms, the technology dramatically reduces the barriers for business and thus the scale and geographic coverage is non-linear in growth potential.

2b. In your group, discuss a company that could be moving toward a platform business or a new firm that is developing as a platform. Sketch out a business model for this firm and the network loop it could be utilizing to drive demand.

Instructors may want to point students to Exhibit 7.14 in thinking about this question. The chapter notes hotels, taxis, and online shopping as examples of new platforms. Media provides several examples as well the students make want to think about. Other ideas could be in clothes sharing (Rent the Runway).

Student teams can find new examples as technology advances with new impacts for consumers and businesses.

2c. Can you identify a pipeline business that is likely to be disrupted by the firm you discussed in question 2b above? What could this pipeline business do to improve its long-term viability?

Here students are encouraged to consider how business models have changed with digital platforms.

Traditional taxis and rental cars are impacted by ride-hailing platforms like Uber and Lyft. Hotels and rental markets are affected by Airbnb and VRBO platforms.

Related MiniCase Instructors may want to consider assigning and discussing the following MiniCase, which covers topics found in this chapter. Every MiniCase has assignable McGraw Hill Connect® case questions available.

MiniCase 7: Platform Strategy: How PayPal Solved the Chicken-or-Egg Problem

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Strategic Management, 6e Teacher‘s Resource Manual

Corporate Strategy: Vertical Integration and Diversification Teacher Resource Chapter Contents

Teacher’s Resource Manual (TRM): Implementation Guide

ii

Learning Objectives

1

Textbook Chapter Contents

2

Chapter Teaching Resources

3

Overview of Chapter

5

Classroom Outline

7

Strategy Highlights

19

myStrategy

19

Discussion Questions

20

TRM Extra: Social/Ethical Questions

21

TRM Extra: Small Group Activities

22

Related MiniCase

24

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Strategic Management, 6e Teacher‘s Resource Manual

Teacher’s Resource Manual: Implementation Guide This Teacher‘s Resource Manual (TRM), supports delivery of your chosen curriculum and pedagogy.

This manual contains more than just guidance on how to cover concepts discussed in the sixth edition of Strategic Management; it also provides tips and best practices for how to utilize the full product suite (from the textbook to SmartBook® to Connect®). In addition, this manual includes a variety of supplemental teaching resources to enhance your ability to create an engaging learning experience for your students. Regardless of whether you teach in face-to-face traditional classrooms, blended (flipped) classrooms, online environments, or hybrid formats, you‘ll find everything you need in this improved resource.

The TRM follows the order of the textbook outline for each chapter and is divided into sections for each learning objective. Each section identifies the relevant PowerPoint slides from both the Lecture slides and the Supplemental Lecture slides (more on this below). This eases your preparation time for class as you can adjust slides as needed to ensure your students stay actively engaged throughout each session.

WHAT INSTRUCTOR RESOURCES ARE AVAILABLE? Within each section of the TRM you will find an assortment of examples, exercises, Connect® assignments, updates on the latest research, Strategy Smart Video discussions, and end-of-chapter discussion questions and exercises from which you can choose to enhance your students‘ learning and engagement.

Within the Connect® Library, you will find the following: In the Test Builder tab, you can create tests from the Test Bank that can be printed or administered within your LMS. In the Instructor Resources, you can access all of the following items:         

Teacher‘s Resource Manual PowerPoints (Accessible) Application-Based Activities‘ accompanying Teaching Notes Create™ Case Support MiniCase Support Sample Syllabi Video Library Capsim‘s Capstone Simulation and Capsim IM Image Bank (for your customized PowerPoints)

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Strategic Management, 6e Teacher‘s Resource Manual 50) This Teacher‘s Resource Manual is posted by chapter.

51) Two sets of ADA-accessible PowerPoints are available with each chapter: a. Lecture slides cover chapter concepts and exhibits. b. Supplemental Lecture slides cover: i. ii. iii. iv.

Chapter Cases Strategy Highlights Implications for Strategic Leaders Strategy Smart Video selections (not part of the book, but an additional resource found here) v. Key Terms

52) Test Bank questions, found in the Library tab entitled Test Builder, are posted by chapter. You will find a variety of question types within the test bank such as Matching, Ranking, Multiple Choice, Select-All-That-Apply, True/False, Short Answer, and Essays to test student mastery across Bloom‘s Taxonomy (i.e. Understand, Apply, and Analyze).

53) Create™ Case Support (all cases are available in Create™ and selected ones in HBP) a. A case matrix that identifies the industry sector covered by each case, as well as the primary and secondary chapter alignments b. One-page case abstract for quick overview of each case c. Case Teaching Notes for instructor use only d. Case Financials in Excel files for the exhibit data in the most popular cases e. Case Strategic Financial Analysis template f. Instructions on How to Download SEC Financial Data into Excel Spreadsheets 54) MiniCase Support (all MiniCases are located in Part Four of the book) a. MiniCase Teaching Notes comprising suggested answers to the MiniCase discussion questions. In some instances, they also provide specific additional article and video resources to accompany each MiniCase.

55) Video Resources, located in the Video Library, provide links to supplemental video resources to accompany both the MiniCases and full-length Create™ cases, as well as links to all of the assignable videos in Connect®.

56) A link to Capsim’s Capstone Simulation and a Capsim Instructor’s Manual correlated to Strategic Management is provided; this simulation allows students to apply their knowledge of key strategy concepts.

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Strategic Management, 6e Teacher‘s Resource Manual

HOW CAN SMARTBOOK® ENHANCE MY STUDENTS’ PERFORMANCE? SmartBook® is assignable through Connect®, McGraw Hill‘s online assignment and assessment system.

One of the first fully adaptive and individualized study tools designed for students, it creates a personalized learning experience, giving students the opportunity to practice and challenge their understanding of core strategy concepts. The reporting tools within SmartBook® show where students are struggling to understand specific concepts.

Typically, SmartBook® is assigned by module (chapter), and instructors can set which learning objectives to cover as well as the number of probes the student will see for each assignment. Instructors also set the number of points a SmartBook® module is worth in the course. Usually, applying a minimal number of points for completion of each module is enough to encourage students to read the chapter.

Many instructors assign these modules to be completed before the class or online session.

SmartBook® provides several diagnostic tools for instructors to gauge which concepts their students struggle to understand. Below is the set of adaptive assignment reports available in SmartBook®:      

Progress Overview: View student progress broken down by module.

Student Details: View student progress details plus completion level breakdown for each module.

Module Details: View information on how your class performed on each section of their assigned modules.

Practice Quiz: This gives you a quick overview of your students‘ quizzes results.

Missed Questions Metacognitive Skills

By selecting ―Module Details‖ the instructor finds the results for the students in the class overall. These details reveal where in the chapters students might be struggling. The module gives the chapter section, average time spent, average questions per student correct/total, and the percentage of correctness (number of assigned items). Information about the most challenging sections for students can help instructors refine the focus of the next classroom or online session.

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Strategic Management, 6e Teacher‘s Resource Manual For more detailed analysis, SmartBook® captures students‘ confidence in their competency using the ―Metacognitive Skills‖ report. Below (a recreation of the Metacognitive Skills report), we find the second student is confident and mostly correct (91% in the correct & aware column) while the first student ―doesn‘t know what they don‘t know‖ (39% in the far-right column).

STUDENT

Student 1 Student 2 Student 3 Student 4 Student 5 Student 6 Student 7 Student 8 Student 9 Student 10

CORRECT and AWARE 61% 91% 81% 83% 76% 66% 77% 91% 93% 70%

CORRECT and UNAWARE 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

INCORRECT INCORRECT and AWARE and UNAWARE 0% 39% 3% 5% 0% 19% 0% 17% 3% 21% 9% 25% 3% 20% 2% 7% 2% 5% 6% 25%

APPLICATION EXERCISES, QUIZZES, AND TEST BANK What resources are available at the book level?

Connect® offers a wealth of content for both students and instructors. Application Exercises require students to apply key concepts to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor. Before getting into chapter-level assignments, let‘s look at the book-level assignments available.

Four exercises are available for instructors to assign beyond the chapter materials. These are 1) MiniCase Case Analyses, 2) Case Exercises, 3) Financial Ratio Reviews, and 4) MyStrategy exercises.

The Financial Ratio Reviews and MyStrategy exercises comprise our new Student Primer in Connect.

29) To encourage analytical thinking, each MiniCase from Part Four of the book is also an assignable application exercise (MiniCase Case Analysis). Each MiniCase is followed by four to five multiple-choice questions that assess students‘ understanding of the key issues presented in the MiniCase.

30) Case Exercises focus on the key symptoms and influences of a problem a firm might be facing, followed by a series of questions that help students understand how the firm eventually achieves a solution to that problem (or asks students to suggest a solution).

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Strategic Management, 6e Teacher‘s Resource Manual 31) Financial Ratio Reviews give students the opportunity to further hone their financial analysis skills; review exercises cover each type of financial ratio (activity, leverage, liquidity, market and profitability).

32) MyStrategy exercises for each chapter provide direct personal applications of strategy concepts to careers and lives to help students internalize the content.

What resources are available for each chapter and how should I integrate them in my course?

Consider assigning one or two Application Exercises per chapter. They are built around chapter learning objectives, so the instructor can choose based on their focus for each specific chapter. Several types of application exercises are available in each chapter. The newest additions are our Animated Videos, comprising three- to four-minute videos on key concepts or concepts that tend to challenge students the most. Each animation is accompanied by three to four multiple-choice questions to check student attention and comprehension. Comprehensive Case Analyses and our new On-Location Video Cases feature firms and industries different than those discussed in the textbook and provide relevant, topical information for students. Finally, Click-and-Drag exercises help students actively demonstrate their understanding of the associated learning objectives. Application Exercises can be assigned as preparatory exercises due before class (this is especially good for flipped classrooms), or after class as concept comprehension checks. Applications Exercises will generally be assigned as homework or practice as part of the overall class grade. A general rule of thumb would be to make application exercises worth 5 to 10 points each since these require time and thought.

To find the Applications in Connect®, go to ―Add Assignment‖ and then select ―Question Bank.‖ Application Exercises are organized by chapter. Instructors have the option to select for one attempt only, but they may want to give students unlimited or multiple attempts on the first few assignments to give students a chance to learn and navigate the system. (As the course progresses, instructors may want to tighten up the time on task and reduce the number of attempts to complete each exercise).

Chapter quizzes and full chapter test banks are available for assignment, and like the Application Exercises, are organized by chapter. The value applied to each question should be relatively low because numerous questions are usually assigned for each chapter. As such, make these questions worth 1 or 2 points each. The feedback given to students is time-flexible. Selecting feedback to be displayed after the assignment due date helps to keep students from giving the correct answers to other students while the questions are still available. For this reason, it is suggested that no feedback to quizzes and test bank exams be made available until after the assignment is due.

When should I assign these digital components?

To fully utilize the power of the digital components, instructors will often assign the SmartBook® reading and adaptive learning probes before class meets. Application Exercises can be completed either before or after class; if they are completed before class, they can sometimes serve as good springboards for class discussions. The chapter quiz makes a good check on comprehension of the material and may work best if assigned after each class period. The test bank serves as a good resource for building midterm or final exams.

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Strategic Management, 6e Teacher‘s Resource Manual More detailed information on SmartBook® and Connect® is available through several resources at McGraw Hill. A good starting point is your local Learning Technology Representative, who can be found here: http://www.mheducation.com/highered/platforms/connect/features-educators.html

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Strategic Management, 6e Teacher‘s Resource Manual

COURSE PREPARATION Helpful Suggestions Regarding Assignment Policies: Connect® gives instructors a wide array of flexibility in making assignments and creating grading policies. Instructors may choose to: 

assign as many assignments as appropriate given the level and time commitment expected for the class,



determine point values for each question/application that works within the total course percentages,



make available multiple attempts per assignment with options of accepting the highest score or averaging all the attempts together (several attempts are particularly good for homework assignments),



deduct points for late assignment submissions (percentage deduction per hour/day/week/etc.) or create hard deadlines thus accepting no late submissions,



show feedback on application/questions immediately upon submission or at the time the assignment is due for the whole class, create new assignments or questions from scratch, or edited versions from a variety of provided resources.

Throughout the TRM for each chapter, we will integrate materials from the Lecture PowerPoint slides, Supplemental Lecture slides, Connect® Application Exercises, and MiniCases. This integration of resources will allow for a cohesive presentation of the relevant resources at your disposal, helping you to convey these topics effectively and efficiently to your students.

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Strategic Management, 6e Teacher‘s Resource Manual

CHAPTER 8 Learning Objectives 8-1

Define corporate strategy and describe the three dimensions along which it is assessed.

8-2

Explain why firms need to grow, and evaluate different growth motives.

8-3

Describe and evaluate different options firms have to organize economic activity.

8-4

Describe the two types of vertical integration along the industry value chain: backward vertical integration and forward vertical integration.

8-5

Identify and evaluate the benefits and risks of vertical integration.

8-6

Describe and examine alternatives to vertical integration.

8-7

Describe and evaluate different types of corporate diversification.

8-8

Apply the core competence–market matrix to derive different diversification strategies.

8-9

Explain when a diversification strategy does create a competitive advantage and when it does not.

Firms must decide in which industries and global markets to compete and understand that these choices are likely to change over time. Answers to these important questions are captured in a firm‘s corporatelevel strategy. In this chapter, the first of three on corporate strategy, we define corporate-level strategy and then look at two fundamental corporate-level strategy topics: vertical integration and diversification.

We will also cover make-or-buy decisions and identify when diversification can aid the firm in gaining a competitive advantage.

A chapter opening case on Amazon and two strategy highlights are included in the chapter for tangible applications of the theoretical frameworks discussed.

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Strategic Management, 6e Teacher‘s Resource Manual

Text Chapter Contents Chapter Case 8: Amazon‘s Corporate Strategy 8.1 What Is Corporate Strategy? (LO 8-1, LO 8-2) CONNECT® INTEGRATION Whiteboard Video: Corporate Strategy CONNECT® INTEGRATION Multiple Choice: Why Firms Need to Grow 8.2 The Boundaries of the Firm (LO 8-3) Strategy Highlight 8.1: The Equity Alliance between Coca-Cola and Monster: A Troubled Engagement?

8.3 Vertical Integration along the Industry Value Chain (LO 8-4, LO 8-5, LO 8-6) CONNECT® INTEGRATION Case Analysis: Vertical Integration 8.4 Corporate Diversification: Expanding Beyond a Single Market (LO 8-7, LO 8-8, LO 8-9) CONNECT® INTEGRATION Matching/Multiple Choice: Corporate Diversification and Firm Performance CONNECT® INTEGRATION Multiple Choice: Alternatives to Vertical Integration and Diversification Strategies CONNECT® INTEGRATION Grouping: Core Competence—Market Matrix Strategy Highlight 8.2: P&G’s Diversification Strategy: Turning the Tide?

8.5 Implications for Strategic Leaders ChapterCase 8 / Part II CONNECT® INTEGRATION Comprehension Case: Amazon’s Corporate Strategy

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Strategic Management, 6e Teacher‘s Resource Manual

Chapter Teaching Resources SECTION

Title

RESOURCE TYPE

CHAPTERCASE 8

Amazon‘s Corporate Strategy Amazon Opens Brick-And-Mortar Stores Meant to Emphasize Convenience

Web Audio (3 min)

Small Group Exercise: Amazon vs.

Barnes & Noble

TRM Extra

Corporate Strategy

Connect® Whiteboard Video

Why Firms Need to Grow

Connect® Multiple-Choice Exercise

Why It‘s Still a World of ‗Grow or Go‘

Online Article

Alternatives to Vertical Integration and Diversification Strategies

Connect® Multiple-Choice Exercise

Horizontal & Vertical Integration

Web Video (15 mins)

Vertical Integration

Connect® Case Analysis

Intel‘s Earnings Boosted by DataCenter, PC Demand

WSJ article

Corporate Diversification and Firm Performance

Connect® Matching/Multiple Choice Exercise

Ecolab Acquisitions: One Year Down the Road

Online article

Ethical/Social Issues: Facial Recognition

TRM Extra

8.1: What Is Corporate Strategy?

8.2: The Boundaries of the Firm 8.3: Vertical Integration along the Industry Value Chain

8.4: Performance Corporate Diversification: Expanding Beyond a Single Market

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Strategic Management, 6e Teacher‘s Resource Manual Netflix Won‘t Lose Its Place on the Dial

WSJ article

Small Group Exercise: Agri-tourism

TRM Extra

Core Competence—Market Matrix

Connect® Grouping Exercise

Alternatives to Vertical Integration and Diversification Strategies

Connect® Multiple Choice Exercise

Amazon‘s Corporate Strategy

Connect® Comprehension Case

―Breaking Down the Barriers to Corporate Resource Allocation‖

Online Video

MiniCase 8: GE: Corporate Strategy Gone Wrong

Rothaermel Textbook

8.5: Implications for Strategic Leaders

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Strategic Management, 6e Teacher‘s Resource Manual

Overview of the Chapter 8.1

What Is Corporate Strategy?

Corporate strategy involves the decisions that leaders make to create a competitive advantage in several markets and industries simultaneously. This challenge involves decisions among the dimensions of:   

Vertical integration: in what stages of the industry value chain should the firm participate?

Diversification: what range of products and services should be offered?

Geographic scope: in what regional, national, or international markets should a firm compete?

A firm‘s long-term success is tied to managed growth—in order for a firm to remain a viable investment—either for public or private investment over time.

8.2

The Boundaries of the Firm Establishing the boundaries of the firm is a critical challenge in defining a corporate strategy. A pivotal consideration surrounds transaction costs—these costs, illustrated in Exhibit 8.3, include not only the external transaction costs of the market, but the internal costs of both the seller and buyer. In looking to optimize these costs, a firm is faced with the subsidiary decision on whether to make or buy components. Exhibit 8.4 displays a two-by-two matrix exploring the trade-offs of firm vs market against advantages and disadvantages. Exhibit 8.5 demonstrates alternatives along the make-or-buy continuum. One favored alternative is the strategic alliance—some aspects of this are explored in Strategy Highlight 8.1 which discusses the relationship between Coca-Cola and Monster.

8.3

Vertical Integration Along the Industry Value Chain The consideration of firm boundaries inevitably queues up the question of vertical integration across an industry value chain. The stages of this chain are displayed in Exhibit 8.6. Given the initial position of a firm relative to the value chain, exhibit 8.6 provides an examples using HTC and the smart phone industry. While vertical integration has potential benefits including lowering costs and improving quality, these results are not given – and hold risks for negative impacts on the same metrics. Exhibit 8.8 showcases an example of differential profit potential along the industry value chain. These trade-offs must be evaluated to conclude whether vertical integration makes sense or to investigate alternatives to vertical integration such as taper integration shown in Exhibit 8.9. Another alternative is outsourcing which will be discussed in Chapter 10.

8.4

Corporate Diversification: Expanding Beyond a Single Market The previous section examined vertical integration; in this section we examine the strategic options for horizontal expansion—corporate diversification. These options include the 5

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Strategic Management, 6e Teacher‘s Resource Manual possibilities of product diversification and geographic diversification. Exhibit 8.10 illustrates the four main types of diversification from dominant business to unrelated (conglomerate) diversification. A consideration in looking at this issue is shown in Exhibit 8.11 with the two-bytwo matrix of markets and core competences. The diversification-performance relationship is highlighted in Exhibit 8.13. Exhibit 8.14 examines the possibilities of value creation and costs relative to vertical integration and diversification. Finally, exhibit 8.15 displays the trade-offs for restructuring between relative market share and market growth.

3.5

Implications for Strategic Leaders The world is always changing as such corporate strategy must be dynamic. ChapterCase 8 / Part II examines the dynamic issues facing Amazon Web Services (AWS). The issues that must be considered include degree of vertical integration, type of diversification, and geographic scope.

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Strategic Management, 6e Teacher‘s Resource Manual

Classroom Outline ChapterCase 8 Amazon’s Corporate Strategy The opening ChapterCase discusses the story of the founding of Amazon.com which is now more than 25 years old. Building from its online book selling to an overall marketplace welcoming third party sellers moved the firm into a global environment. Building on its slogan of ―the everything store,‖ Amazon continues to cover a wide variety of consumer needs including country specific sites to enhance their global footprint. The firm has also moved vertically with cloud-based computing services and developing its own content for Prime video streaming. Also, Amazon has bought Whole Foods and started AmazonCampus to further broaden its product and market reach.

INSTRUCTOR SUPPLEMENT SLIDE 3

ChapterCase 8 Part II The closing ChapterCase provides more information on Amazon‘s most profitable business endeavor – Amazon Web Services (AWS). While hugely profitable, the competitive environment is becoming more complex and the growth rate for AWS is declining. Understanding the relationships between AWS and Amazon‘s core business is critical.

ChapterCase 8 Discussion Questions 1. Describe Amazon's diversification strategy using Exhibit 8.10. What type of diversification strategy is Amazon pursuing? Explain.

The easiest case is that Amazon started in retailing books online and has vastly expanded to retail almost anything online. The growth into their Kindle e-reader and Amazon Web Services is usually considered vertical movement related to the core business of consumer retailing. Amazon‘s recent acquisition of iRobot (and the Roomba) follow this vertical movement. The more recent expansion to college campuses is a horizontal expansion to new markets, while the purchase of Whole Foods adds dimensions to expand product depth and delivery services from the physical stores. In sum, the firm is using a related-linked diversification strategy.

2.

What is Amazon‘s core business? Is AWS related to Amazon‘s core business? Why or why not? Some investors are pressuring Amazon‘s CEO to spin out AWS as a standalone company. Do you agree with this corporate strategy recommendation? Why or why not? Hint: Do you believe AWS would be more valuable within Amazon or as a standalone company?

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Strategic Management, 6e Teacher‘s Resource Manual Investors like ―pure plays‖ especially when businesses have radically different margins, growth rates, and growth prospects. As all three of these issues apply to Amazon‘s situation, a split would be in investors‘ best interest. Although Amazon‘s algorithms, data, and knowledge of its customers are key success factors in retailing, owning the physical servers that hold these resources probably is not. They could spin off the cloud server business with its servers and the retail business could rent server time with little to no loss of synergies. Thus, an AWS spinoff is a reasonable option.

3.

At this point, Alphabet and Meta are the clear leaders in the digital ad space, which is predicted to continue to grow exponentially (reaching $256 billion in 2025, more than three times the expected spending of $81 billion on traditional TV advertising). Although Amazon‘s market share was a mere 12% in online advertising (in 2021), many believe that Amazon is best positioned to be the market leader in the digital ad space in the future. What is the basis of this argument?

Do you agree with this assessment? Why or why not? Buttress your position.

The question of ―who will own‖ the digital ad space requires both an investigation of the boundaries of the firm and the five forces competitive model. The concept of digital ads presupposes and understanding of the platform that the consumer is using for the majority of their Internet experience.

While if we could assume that the driving force is a ―shopping‖ experience, there is little question that Amazon is the likely winner—the alternatives of a ―social interaction‖ experience would favor Meta or a ―data inquiry‖ experience would seem to favor Alphabet. How can each of these firms expand the boundaries to create a triple threat across the various products of virtual environment? Amazon‘s foray into streaming and live TV (i.e., Amazon has broadcasting rights for Thursday Night Football) has it entering into competitive spaces that will allow them to access additional opportunities in digital ad space. With Meta focusing on the Meta-verse, there are both increasing pressures to perform well in this sphere.

4.

Amazon continues to spend billions on seemingly unrelated diversification efforts. Do you believe these efforts contribute to Amazon gaining and sustaining a competitive advantage? Why or why not?

Students will have differing opinions on this but push them to ground their opinions with theory and evidence. Their arguments should address theory both in respect to the benefits of leveraging their technology and brands across multiple businesses and the downsides of increased complexity, brand dilution, and diversification discount.

In November 2015, Amazon announced the opening of its first brick-and-mortar store in a mall in Washington. Since then the firm has moved into 11 states with variants of a physical store as of fall 2019. Ask students whether they believe that expansion of this chain risks damaging Amazon‘s competitive advantage by burdening it with the costs of its more traditional rivals. (See NPR ―Amazon Opens Brick-And-Mortar Stores Meant To Emphasize Convenience‖ with a three-minute audio stream available). Amazon is also continuing to make purchases including its $1.7 billion acquisition of iRobot (Why Amazon Paid $1.7 Billion for a Roomba).

Here is a link to a news report video about the impacts of the purchase of Whole Foods one year after the purchase. It runs less than 4 minutes.

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Strategic Management, 6e Teacher‘s Resource Manual

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity including a discussion of Amazon in competition with Barnes & Noble for the college student market.

8.1 WHAT IS CORPORATE STRATEGY? LO 8-1 Define corporate strategy and describe the three dimensions along which it is assessed.

LECTURE SLIDES 3–5 EXAMPLES As an example, take the computer-technology company Oracle, whose core competency lies in enterprise software. Oracle engaged in related diversification through backward vertical integration into computer hardware by acquiring Sun Microsystems, and forward vertical integration into human resource management systems (HRMS), and customer-relations management (CRM) software by acquiring PeopleSoft. In its corporate strategy, moreover, Oracle pursues related as well as unrelated diversification. It leveraged its core competency into intellectual property (IP) management for media and entertainment businesses by its acquisition of Sophoi. Finally, Oracle pursued unrelated diversification into online identity theft and fraud protection through its acquisition of Bharosa. It is also noteworthy that through organic growth, Oracle executed its corporate strategy along the vertical value chain and on diversification through acquisitions. It now has over 40 subsidiaries, some of them quite large, such as BEA Systems. A current list of Oracle acquisitions is available from their website here.

DISCUSSION TOPICS Consideration is given to the three dimensions of corporate strategy. The dimensions are NOT independent of each other and, as noted in the Part II extension to the chapter opener, they can either reinforce each other or conflict with one another. We find it valuable here in Chapter 8 to note that we are finally at the part of strategy that many students thought was all they knew of strategy before they started this course. The ―corner office‖ approach to strategy in many organizations tends to focus on strategic plans and corporate strategies emanating from the CEO‘s office. Students are sometimes surprised at the relative simplicity of the dimensions of corporate strategy shown, and yet the interaction of these dimensions yields a rich variety and depth of possible corporate actions (which we will be exploring in Chapters 8, 9, and 10).

LO 8-2 Explain why firms need to grow, and evaluate different growth motives.

Growth gives a firm many advantages, such as greater appeal to top talent, lower cost and greater access to equity capital and debt financing, and attractiveness to the best potential alliance partners. McKinsey Quarterly published a study on the importance of growth to firm survival and found these results: ―From 9 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual 1983 to 2013, for instance, roughly 60 percent of the nonfinancial companies then in the S&P 500 were acquired—it‘s grow or go, and they have gone … Sixty of the 78 S&P 500 companies that generated top-line growth and improved or at least maintained their margins outperformed the S&P 500.

Companies with deteriorating margins performed less well, even if these companies were growing; just 8 out of 30 outperformed the index.‖ (See ―Why It Is Still a World of ‗Grow or Go‘,‖ McKinsey Quarterly, for the rest of the findings and some excellent supporting graphs.)

INTEGRATION Whiteboard Video: Corporate Strategy This animated video case analysis provides an overview of these the major elements of corporate strategies. It can complement or substitute for a short classroom lecture on the concepts. 

Difficulty: Medium

 Blooms: Apply

INTEGRATION Multiple Choice: Why Firms Need to Grow This exercise will help students to understand the drivers of growth within an organization and how strategic leaders evaluate the benefits and risks of different strategic alternatives. 

Difficulty: Medium  Blooms: Apply

8.2 THE BOUNDARIES OF THE FIRM LO 8-3 Describe and evaluate different options firms have to organize economic activity.

LECTURE SLIDES 6–12 In this section, Exhibit 8.2 illustrates internal and external transaction costs. Transaction cost economics is a powerful yet relatively simple framework that explains much about the underlying causes of why firm boundaries are established within markets.

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Strategic Management, 6e Teacher‘s Resource Manual DISCUSSION TOPICS Some students are not comfortable with the term ―transaction cost economics,‖ but the idea it portrays is not too difficult to understand. In many ways, we face make-or-buy decisions all the time and choose based on our often-unexpressed understanding of the trade-offs. ―I will stop to buy fast food on the way home from school because I want to spend my time at home making study cards for my upcoming exam.‖ This simplistic example says in essence, I‘m going to buy my food so that my time is spent creating cognitive learning for a more successful outcome on my exam tomorrow.

Exhibit 8.5 offers important insights for students with limited work experience. They have a clear understanding of the two ends of the diagram—buy or make in-house, but the intermediate alternatives are less obvious. Firms often structure their businesses using more than one of these options. For example, quick service restaurants have company-owned and operated locations, as well as franchised operations (probably the version seen on campus). McDonald‘s has company-owned and managed sites but relies much more heavily on franchises. Gasoline is marketed through armslength transactions, through an arrangement similar to franchises, through companyowned/independently operated sites, and through company-owned and operated sites.

Strategy Highlight 8.1 The Equity Alliance between Coca-Cola and Monster: A Troubled Engagement?

Click here for a summary of the Strategy Highlight covering the relationship between the Coca-Cola company and Monster (energy drinks).

INSTRUCTOR SUPPLEMENT SLIDE 5: THE EQUITY ALLIANCE BETWEEN COCA-COLA AND MONSTER

8.3 VERTICAL INTEGRATION ALONG THE INDUSTRY VALUE CHAIN LECTURE SLIDES 13–22 STRATEGY SMART VIDEO INSTRUCTOR SUPPLEMENT SLIDE 15 The slide links to a 15-minute video comparing vertical and horizontal integration. To limit the discussion to vertical, stop the video at 8 ½ minutes.

In Chapter 4, we introduced the concept of the firm-level internal value chain. That internal value chain depicts the activities the firm engages in to transform inputs into outputs, with activities ranging from basic R&D to customer service. Internal, firm-level value chains are also called horizontal value chains.

Thus, there are two intersecting value chains: the industry value chain running vertically from upstream 11 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual to downstream, and the firm-level value chain running horizontally. In this chapter on corporate strategy, the one of interest is the vertical, industry value chain, portrayed in Exhibit 8.6.

LO 8-4 Describe the two types of vertical integration along the industry value chain: backward vertical integration and forward vertical integration.

Exhibit 8.7 offers an engaging illustration of the value chain for an industry. We find students often are intrigued with the stages their valued smartphones and other electronics go through before arriving at the store for them to purchase. You might want to ask where students see other parts of the smartphone ecosystem, such as app developers and the makers of cell towers.

LO 8-5 Identify and evaluate benefits and risks of vertical integration.

Vertical integration (both forward and backward) can benefit firms via lowering costs, improving quality, facilitating scheduling and planning, and facilitating resource access and investments. On the flip side, vertical integration has been associated with increased costs, reduced quality and flexibility, and the possibility of increased legal scrutiny and repercussions.

DISCUSSION TOPICS Why did Pepsi exit the bottling industry in 1999? Why did it buy back into this segment in 2009? Pepsi exited out of the capital intensive, low margin bottling industry in 1999 to concentrate on marketing. In 2009 they bought their major bottlers for $7.8 billion to obtain more control over its quality, pricing, distribution, and in-store display, to improve decision making, and to enhance flexibility to bring innovative products to the market faster.

Why does Ashley Furniture own its trucking operations? Most firms view trucking as an ideal area of value chain to outsource. Using Exhibit 8.4, why does it make sense for some firms, like Ashley, to go their own way in making make-versus-buy decisions? (See ―A Radical Supply Chain Idea: Own Your Trucking Operation,‖ The Wall Street Journal)

INTEGRATION Case Analysis: Vertical Integration This activity builds student comprehension of vertical integration. Complementing the textbook discussion of HTC in the smartphone industry, this case discusses Apple‘s purchase of a semiconductor firm. The student must read the case provided, as well as the relevant textbook section, and answer the five questions in this exercise.

Follow-Up Activity: The instructor can expand on the concepts from this interactive by discussing the benefits and risks of vertical integration from the textbook. Deciding which operations to have inside the 12 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual firm and which to use the market system for are decisions that can have profound impacts on the performance of a firm in the long term, yet often they are undertaken for short-term monetary reasons. 

Difficulty: Medium  Blooms: Apply

LO 8-6 Describe and examine alternatives to vertical integration.

DISCUSSION TOPICS The satirical media firm the Onion has a funny video about employees outsourcing their own work here.

For an example of the disadvantages of vertical integration, consider Alcoa‘s decision to separate its raw material business from its parts manufacturing business. Technological change in which many of its parts rely heavily on supplies of metals other than aluminum, and oversupply of commodity raw materials created negative synergies between the two businesses and made disaggregation preferable to vertical integration (see ―Alcoa to Split as Aluminum Glut Pressures Prices,‖ The Wall Street Journal).

8.4 CORPORATE DIVERSIFICATION: EXPANDING BEYOND A SINGLE MARKET LECTURE SLIDES 23–30 LO 8-7 Describe and evaluate different types of corporate diversification.

STRATEGY SMART VIDEO INSTRUCTOR SUPPLEMENT SLIDE 14 This humorous video showing examples of inefficient diversification is a light-hearted way to introduce the topic of corporate diversification. It runs 30 seconds.

Exhibit 8.10 illustrates types of corporate diversification and provides examples of each type.

EXAMPLES When Intel acquired Altera it was able to diversify into networking and wireless equipment, but also create innovative product combinations through technology synergies between the chips made by each company (see ―Intel CEO Accelerates Shift from PCs,‖ WSJ). Yet several years later, Intel‘s financial performance is still tied to personal computers. Fourth quarter earnings from 2019 indicate data centers and PC demand are the main areas driving growth and profits (see Intel‘s Earnings Boosted by DataCenter, PC Demand, WSJ).

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Strategic Management, 6e Teacher‘s Resource Manual

INTEGRATION Matching/Multiple Choice: Corporate Diversification and Firm Performance This activity builds student confidence with the different types of diversified businesses. The student will drag each element to the correct location out of the four provided. Next a related set of three questions is provided for the student.

Follow-Up Activity: The instructor can expand on the concepts from this click-and-drag activity by using the BCG growth-share matrix for classroom and/or small-group homework assignments. Ask the students to research a large company with widely known products and place some of their various products and services into the most appropriate location of the matrix. GE, Tata, Amazon, and Disney would be good candidates for this type of analysis. Sometimes we tie this discussion to a larger case analysis, thus much of the needed research is IN the case. Rothaermel full cases on Amazon, Microsoft, and IBM would be examples of cases that could be used here. 

Difficulty: Medium  Blooms: Apply

INTEGRATION Multiple Choice: Alternatives to Vertical Integration and Diversification Strategies This activity will help students demonstrate their understanding of diversification and other strategic alternatives that companies can pursue to gain some of the benefits of vertical integration without the risks. 

Difficulty: Medium  Blooms: Apply

INTEGRATION Grouping: Core Competence—Market Matrix This activity will show students the different alternatives available to strategic leaders that allow companies to gain some of the benefits of vertical integration without the risks of full ownership of the supply chain. In this exercise, they will use the Core Competence–Market Matrix to derive different diversification strategies.

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Strategic Management, 6e Teacher‘s Resource Manual 

Difficulty: Medium  Blooms: Apply

DISCUSSION TOPICS What makes a diversification related? While at first Ecolab‘s (disinfectants and detergents for restaurants and hospitals) acquisition of Champion Technologies (oil and gas drilling chemicals) may appear unrelated, the firm viewed it as related diversification. Certainly, from a customer perspective they are unrelated. However, the underlying technology in both cases is chemical and the business models are similarly designed around frequently recurring sales. The diversification may also have been driven in part by the tremendous growth in gas drilling; you can also use this example to emphasize that diversification strategies should be predicated at least in part on a five forces analysis to assess industry profit potential. Ecolab has continued this acquisition strategy to the more recently acquiring Gallay Medica & Scientific in October, 2019 (Ecolab Acquisitions: One Year Down the Road). Is this strategy working for Ecolab?

Strategy Highlight 8.2 P&G’s Diversification Strategy: Turning the Tide?

Click here for a summary of the Strategy Highlight covering the corporate strategies of P&G in recent years.

INSTRUCTOR SUPPLEMENT SLIDE 6: P&G’S DIVERSIFICATION STRATEGY: TURNING THE TIDE?

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for information on possible diversification into facial recognition and privacy issues related to the field.

LO 8-8 Apply the core competence–market matrix to derive different diversification strategies.

EXERCISES Here is an example that could be used to teach or assess critical reasoning skills. Disney diversified into a streaming media platform (Disney+) in the fall of 2019. The very public entrance created a sense of ‗streaming wars‘ as other companies also add to the field. What type of diversification is this?

What are the benefits and risks of diversification into this new media for a diversified firm such as Disney? (See ―Streaming War‘s Battle Lines Still Being Drawn,‖ WSJ for an example article). Can you think of other related businesses that Disney could profitably enter? On balance what 15 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual diversification strategy would you recommend for Disney? Justify your position with logical reasoning based on theory from the textbook. Students should be encouraged to refer to Exhibit 8.11 and provide arguments for their position that describe the applicability of Disney‘s core competencies, such as their characters and story lines to film and other media. They also should have arguments on the impact of this diversification strategy on Disney‘s value creation and costs, using Exhibit 8.14.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 18 This 5-minute video is a news story about Fair Oaks Farms which is discussed in the small group exercise below.

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity on agri-tourism and a particularly effective organization running in Indiana.

INSTRUCTOR SUPPLEMENT SLIDE 11 EXERCISES Foxconn Technology Group assembles PCs, video game consoles, mobile phones, and tablets for leading tech firms. Its primary growth driver in recent years has been its contract manufacturing of Apple devices. As Apple‘s growth has slowed, Foxconn has begun to consider further diversification into accessories marketed under its own brand and into contract manufacturing of TVs. It is also planning forward vertical integration into retail sales. Part 1: Ask students to research the Apple/Foxconn business relationship and identify which box of the core competence matrix best describes the new businesses Foxconn is considering (Exhibit 8.11). Part 2: Then ask them to identify the sources of value creation that apply to these new business diversifications using Exhibit 8.14 as a guideline. Part 3: Based on these two analyses ask students to determine which of these opportunities should have the highest priority for Foxconn and provide their rationale for the choice.

LO 8-9 Explain when a diversification strategy creates a competitive advantage and when it does not.

In Exhibit 8.11 we present empirical findings from prior research showing that some types of diversification produce better performance than others (on the average … but what CEO thinks they will get ―average‖ results?!). Although diversification can create shareholder value in theory, it is often difficult to realize in practice. Why then do we see so much diversification taking place? One answer is the principal–agent problem discussed earlier, in which the interests of managers and shareholders diverge. Diversification generally leads to larger entities and thus bestows more power, prestige, and pay 16 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual on corporate executives. In Chapters 11 and 12, we study organizational structure and corporate governance to understand how to align interests of managers and shareholders.

EXAMPLES An example of a highly diversified firm that would be very difficult to restructure is 3M. The firm is well diversified, but its motivation for the diversification has been leveraging its technology across multiple product lines in different industries. If they were to spin-off or sell assets to pull back the scope of diversification and focus the company, they would risk selling technology to rivals that is used in their products in other industries (see ―3M‘s Image Problem: Its Products Are Everywhere, But Often Overlooked,‖ WSJ and ―Which Of 3M‘s 26 Business Lines Makes The Most Money?‖ Forbes).

Globally, conglomerate firm stocks have been priced at a 10 percent discount versus single industry firm, up from 5 percent in prior years, to reflect the pattern shown in Exhibit 8.13. An example of the impact this has on firm portfolios is W.R. Grace‘s movement from being a highly diversified conglomerate to be a much more focused firm in response to both external investor pressure for ―pure plays‖ and negative synergies internally (see ―W.R. Grace: The End of an Empire,‖ WSJ). GE‘s shifts over the years would be another excellent example: A Look Back at GE‘s 129-Year Journey from American Manufacturing Icon to Fallen Giant).

DISCUSSION TOPICS If you have international students from Asia in your class, you might invite a discussion about why conglomerates, like Tata, and conglomerate-like structures (keiretsu and chaebol) are so much more important to the competitive landscape than unrelated diversified firms are in the U.S. and European markets. Western investors have pushed firms to break up unrelated diversifications due to the performance disadvantage illustrated in Exhibit 8.13, but this trend has not carried into Asia. Collective cultures in some Asian countries place a stronger value on relationships, which creates an important type of core competency that can be leveraged across businesses, even unrelated businesses.

Honeywell has been highly successful as a conglomerate and for many years did not receive pressure from investors to divest businesses into ―pure plays.‖ Have students read the article, ―Honeywell Finds Love Amid the Breakups,‖ (WSJ), and discuss what advantages Honeywell brings to its acquisitions as a conglomerate and what characteristics of Honeywell and its strategy have made it successful. The article quotes Steve Winoker, an analyst at Bernstein Research as saying ―Companies aren‘t born with a right to be a conglomerate. That‘s a right only earned over time. And until you earn it, the presumption should be you can‘t do it.‖ Ask students whether they think that conclusion is correct. Why or why not? Then bring students up to date with the fact that investor pressure more recently has pushed the firm into two separate business units. Ask the students to read, ―Honeywell to Spin Off Units Into Two Stand-Alone Companies,‖ (WSJ). Discuss what changed from during these two years that drove this difference in corporate strategy for the firm.

8.5 IMPLICATIONS FOR STRATEGIC LEADERS INSTRUCTOR SUPPLEMENT SLIDE 8 17 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual CLASS EXERCISE To illustrate a practical example of dynamic corporate strategy, invite students to explore IBM‘s strategy for continually adjusting its portfolio to generate higher value. In a 2015 Wall Street Journal interview with former chairperson Ginni Rometty, she discusses the portfolio‘s emphasis on big data, cloud, and mobility. Invite students to discuss what they would need to know to place these three businesses into IBM‘s BCG framework (Exhibit 8.15) and how much of that they can glean from the interview (see ―How IBM Plans to Thrive as a Digital Company,‖ The Wall Street Journal, October 27, 2015 for an excerpt or the video). From there, have students review the annual reports for IBM since 2015 to see if the focus has changed (or how the way that IBM discusses their corporate focus has changed).

McKinsey consultants argue that firms are too slow to change their corporate asset allocation. They attribute this portfolio inertia to both internal resistance to change and the stock market‘s aversion to the short-term pain of the changes. They suggest that new CEOs should take quick bold action to reallocate resources. Choose a new CEO who has just taken the helm of a firm at the time that your course is offered. Recently, Starbucks, Amazon, and Pinterest have experienced CEO turnover. Perhaps more well known in the classroom, Uber replaced its CEO in 2017 (―For New Uber CEO Dara Khosrowshahi, Fresh Challenges Emerge,‖ WSJ). Assign the students to look on the firm‘s website and map out its corporate strategy in terms of diversification and vertical integration. Then show this brief video, ―Breaking Down the Barriers to Corporate Resource Allocation,‖ in class (about five minutes). Ask students to work in small groups to study how either of these CEOs has reallocated resources in the last couple of years at the helm.

Additionally, MiniCase 8: GE: Corporate Strategy Gone Wrong is a good fit for topics covered in this section of the text. GE went from being an investment juggernaut for several decades up to 2000, to losing over 85% of its market valuation from 2001 to 2019. The case presents data on product and geographic changes from 2001 to 2018 for the students to study. MiniCase 8 includes discussion questions also in the textbook. There is also a CONNECT® exercise available that instructors can assign for each MiniCase in the text.

INTEGRATION Comprehension Case: ChapterCase—Amazon‘s Corporate Strategy Here, we provide both Parts 1 and 2 of this case, accompanied by short-answer questions that students can complete and submit. Due to the nature of these open-ended questions, they require manual grading. 

Difficulty: Medium  Blooms: Apply

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Strategy Highlights Strategy Highlight 8.1 The Equity Alliance between Coca-Cola and Monster: A Troubled Engagement?

This strategy highlight examines the issues associated with the very conservative Coca-Cola wanted to tap into the market growth of ―energy drinks‖ without being entangled with the negative aura of the products. After years of deliberation, in 2015, Coca-Cola formed an equity alliance with Monster Beverage Corp. In a parallel track, Coca-Cola created and launched two new energy drinks in Europe (Coca-Cola Energy and Coca-Cola Energy No Sugar). Is this relationship a viable alliance?

Strategy Highlight 8.2 P&G’s Diversification Strategy: Turning the Tide?

This strategy highlight discusses Proctor & Gamble, which is the world‘s biggest consumer products firm. The firm attempted unrelated diversifications and has underperformed in recent years. Under CEO David Taylor, P&G has divested some of those acquisitions and is refocusing on related diversification efforts to improve its competitive positioning. P&G is expanding its direct-to-consumer products and building from its established brands.

myStrategy INSTRUCTOR SUPPLEMENT SLIDE 10: HOW DIVERSIFIED ARE YOU? Here, we encourage the student to take what they have learned about competitive advantage and apply it to his/her own career. Encourage students to spend a few minutes looking at their ideas about future trends and how it may impact their career options.

1. Using Exhibit 8.8 as a guide, list each of your major activity areas. Think of each of these as a business. (If you are literally ―all work and no play,‖ you are a single-business type of personal diversification.) Instead of revenues, estimate the percentage of time you spend per week in each activity. (Most people will be diversified, though some may be dominant perhaps in school or work.) To assess your degree of related- and unrelatedness, consider the subject matter and community involved with each activity. For example, if you are 19 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual studying ballet and working as an accountant, those would be largely unrelated activities (unless you are an accountant for a ballet company).

What conclusions do you derive based on your personal diversification strategy?

This is intended as a mostly fun exercise; however, we have found some students who have benefited from spending a few minutes reflecting on what they view to be important versus how they actually spend their time. One aspect of theory that you could bring to the discussion that builds on the knowledge of Chapter 7 is that creativity is spurred more by non-redundant knowledge than by redundant knowledge. Those students targeting careers in creative fields might be looking for ways to increase their personal diversity.

2. Do you need to make adjustments to your portfolio of activities? Explain the reasons for your answer.

We are of the view that strategy can have benefits at all levels, including those of the individual.

Thinking about how a person will choose to spend their time is helpful in setting up a ―portfolio‖ of integration and diversification activities, leading to improved ―outcomes‖ for the student.

3. Let‘s consider dynamics—has your level of diversification changed over time (say, over the last five years)? Looking toward the future, do you expect your level of diversification to change as you complete your degree? Why or why not?

Many students will view the transition from school to a full-time career as a major time of change and thus a great opportunity for positive changes in routines, habits and motivations going forward.

Discussion Questions 1. Franchising is widely used in the casual dining and fast food industry, yet Starbucks is quite successful with a large number of company-owned stores. In 2019, Starbucks had more than 8,500 company-owned stores in the United States. How do you explain this difference? Is Starbucks bucking the trend of other food-service stores, or is something else going on?

Students may have several thoughts on this question. We expect most have been to a variety of fast-food restaurants and coffee shops. Howard Schultz, the leader who took Starbucks across the United States and the globe, was quite concerned about the atmosphere of the outlets and believed this was better controlled with mostly company-owned locations. Many firms feel that they need to have maximum control (which is what 100% ownership provides) over the core competencies that give them their competitive advantage. Starbucks believes that the ambiance of its store and behavior/skill of its employees are critical to their competitive advantage and growth in the value of its brand (its most valuable asset). In this case, the focus is on quality and consistency across locations.

2. Nike is a large and successful firm in the design of athletic shoes. It could easily decide to forward-integrate and manufacture the shoes it designs. Thus, the firm has a credible threat over its current outsourced manufacturers. If Nike has no intention of actually 20 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual entering the manufacturing arena, is it ethical for the Nike supply chain management to bring up this credible threat during annual pricing negotiations? What are some reasons Nike may want to consider such a vertical integration more seriously?

Students will have a variety of viewpoints on this matter. There are many negotiation tactics that can be considered borderline at best in the ethics arena. In this situation, many business managers would point out that saying you COULD enter the manufacturing business is quite different than saying you ARE adding manufacturing processes to your own firm. Also, remember the idea of taper integration is that even after you start a new process internally, you still can maintain external firms as well. Nike may have a vested interest in having more control over its supply chain – it emerged in the 1990s that Nike‘s factory workers were laboring in sweatshop-like conditions, and Nike has dealt with the public fallout of that scandal. Entering into manufacturing may be a move to improve or continue to develop their reputation.

3. The chapter notes that some firms choose to outsource their human resource management systems. If a firm has a core value of respecting its employees and rewarding top performance with training, raises, and promotions, does outsourcing HR management show a lack of commitment by the firm?

A firm can make the argument that outsourcing to full-time HR professionals who focus only on providing superb HR services is indeed the best way to show respect for the employees of your firm.

The text discusses strategic outsourcing and notes that many firms indeed will outsource their HR management systems to firms such as PeopleSoft or Perot systems. This could be the best way to show a commitment to a strong HR ethic of the firm by outsourcing to an industry leader. Some students will argue that if the firm is truly committed, it should build its own competencies inside the firm. Indeed, it would be difficult to argue that the firm is going to be a differentiator and build competitive advantage around an HR system that is in common usage by a wide variety of firms.

TRM Extra: Ethical/Social Questions 1.

As we look at Google, Facebook and Amazon, all three have potentials for a diversification into the realm of facial recognition. What are the potential benefits? Do the chances of consumer pushback/reputation risks outnumber the potential benefits?

Facebook already incorporates a limited version of facial recognition that allow the ―preidentification‖ other individuals (based on your previous posts) in an ―about to be posted‖ photograph. Is this an issue? In a similar fashion, both Amazon and Google ―request‖ that you include a photo in your personal profile. Why is that? What are the potential benefits to the consumer? What are the dangers that need to be considered? Example WSJ articles on this issue are: Business Groups Push Back Against Proposed Facial-Recognition Bans; and Facial Recognition Priorities: Ethics Boards, Permission Slips. China is particularly assertive in implementing facial recognition across the country. An example WSJ article on this perspective is, Chinese Citizens Must Scan Their Faces to Register for New Mobile-Phone Service. More recent articles include: Clearview AI Agress to Limit Sales of Facial Recognition Database and IRS Retreats From Facial Recognition to Verify Taxpayers‘ Identities.

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Strategic Management, 6e Teacher‘s Resource Manual

TRM Extra: Small Group Activities 1. The ChapterCase 8 mentioned the AmazonCampus initiative. It was developed to compete directly with university bookstores. This is a good corporate strategy for Amazon for many reasons—among them, it provides the company deeper access into the shopping behavior of college students, as well as of their media viewing purchases and habits. It also represents another large competitive threat to Barnes & Noble, which runs more than 700 campus bookstores. To make it beneficial for universities to partner with Amazon, Amazon pays the schools between 0.5 and 2.5 percent of all Amazon purchases made through the university website. Purdue University, one of the first universities to sign on, reportedly made $1 million from Amazon in the first two years of the program. Sixteen campuses had signed up by the end of 2016 with rapid continued growth expected. In August 2015 Barnes & Noble spun off its college bookstore unit into a separate company called Barnes & Noble Education (BNED on the NYSE).

The firm stated the split allows each business to focus on its core. Barnes & Noble will focus on the consumer retail business, which has suffered from online shopping and digital books. The new firm will focus on the higher education market, putting it perhaps in a better position to seek acquisitions on its own.

1a.

In your small group, discuss any potential ethical issues with Amazon paying the university administration for direct access into the school‘s course textbook system.

As one option, the universities may have contractual obligations or verbal commitments of exclusivity to firms that have built brick-and-mortar stores on or near campus. Students already heavily use Amazon as a source of textbooks, due to attractive pricing and one of the big downsides of doing so is that it can be very difficult to figure out exactly which version of a textbook you are required to buy from the description on Amazon‘s site. A university‘s decision to make that information directly available to Amazon could be perceived as doing the greatest good for the greatest number and enhancing competition.

1b.

While Amazon as a firm continues to diversify its products, services, and markets under one corporate umbrella, why do firms such as Barnes & Noble choose to split into separate firms for greater focus on each piece of the business? Do these different strategies align with the core competencies of each? It may be helpful to review Exhibit 8.11.

Brick-and-mortar stores rely extensively on merchandising and on making best use of their limited inventory capacity to match customer needs. Specializing by customer segment makes it easier to optimize these two factors. Amazon is able to manage a digital long tail, does not do physical merchandising, and can easily adapt its offerings by customer using a login ID. 1c.

If your team was asked to consult for Barnes & Noble Education, which corporate strategies would you recommend to the company‘s senior leadership?

The big challenge for instructors in this question is to push the students to think like Jeff Bezos or like investors, not like the college students who buy their books from this firm. Without guidance in this regard, the discussion could easily be a list of promotional programs that result in lower textbook prices to students, thus margin deterioration, rather than a movement toward improved financial returns. Key points for students to consider are physical versus digital books and the penetration rate of the classroom 22 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual students that actually buy the book rather than borrow one or do without a text at all for the course.

What does a physical bookstore on or near campus have as advantages over a ―locker space‖?

2. Agriculture is one of the largest and oldest industries in the world. In the United States and many other countries, farmers often struggle to turn a profit given the variabilities of weather and commodity prices. Some working farms are turning to tourism as an additional and complementary revenue source.

One of the most successful large companies leading this marriage of industries is a farm in Indiana: Fair Oaks Farms (www.fofarms.com) opened in 2004 and is home to 37,000 cows and produces enough milk to feed over 8 million people. Fair Oaks is also participating in the education market as a popular destination for school field trips. In addition to the original dairy adventure, a pig adventure was added in 2014 and a crop adventure arrived in 2016. More recently a full-service hotel and fine dining restaurant would indicate a strategy to become a multi-day destination for families. A video of the operation by the CEO is available at www.youtube.com/watch?v=Dz_gE4887so. Some call it the ―Disneyland of agritourism‖ due to its widespread success and family-oriented entertainment options.

Such ingenious business diversification can offer many benefits to the agriculture industry.

2a.

What other industrial or commercial industries could benefit from such potential tourist or recreational revenues? Discuss what new and complementary capabilities would need to be developed in order to succeed.

One possible option might involve one of the companies of Silicon Valley creating the infrastructure for dedicated ―tech tourism.‖ The area boasts the headquarters of Apple, Google and Facebook – as well as the garage where Bill Hewlett and David Packard founded HP. The Computer History Museum is also located in Mountain View. While tech companies are famous for their secrecy, would it be possible for one of the ―players‖ – maybe an older company entering the declining life cycle to look at tourism as a revenue or reputation source? Starting with an impressive visitor‘s center and narrated bus tours of the major companies of the area, they could expand with ―hands-on‖ demos and classes offered for additional fees. Of course, a large gift shop would be necessary. Picture for example ―Apple Tech Tours‖ providing an exterior tour of the Apple circular HQ with special parking and photo spots for the ‗techie tourist‘.

2b.

In your group, list other industry combinations you have seen be successful. Consider why you think the combination has been a success.

There are several examples in which professional sports venues have been combined with some form of hospitality venue. One of the best known examples is Rogers Centre (aka The Sky Dome) in Toronto where the individual suites in the attached hotel can seat up 30 to watch a basketball game. In the early 70‘s, the city of Atlanta built the Omni complex to house the Hawks (NBA) and the Flames (NHL). It included not just an attached hotel, but also a shopping mall with a skating rink, multi-plex movie theater and a live stage dinner theatre. The most unique aspect was an indoor amusement park, the World of Sid & Marty Croft. The concept failed with the only remaining feature being the hotel – what was the shopping mall is now the headquarters of CNN and the coliseum was replaced by State Farm Arena. How would you create a combination that could succeed? One key to success involves the development of the ancillary entertainment/hospitality features that are a sufficient draw to be viable when the sports venue is not being used.

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Strategic Management, 6e Teacher‘s Resource Manual

Related MiniCase Instructors may want to consider assigning and discussing the following MiniCase, which cover topics found in this chapter. Every MiniCase has assignable McGraw Hill Connect® case questions available.

MiniCase 8: GE: Corporate Strategy Gone Wrong

CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions Teacher Resource Chapter Contents Teacher’s Resource Manual (TRM): Implementation Guide

ii

Learning Objectives

1

Textbook Chapter Contents

2

Chapter Teaching Resources

3

Overview of Chapter

5

Classroom Outline

6

Strategy Highlights

19

myStrategy

20

Discussion Questions

21

TRM Extra: Social/Ethical Questions

22 24

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Strategic Management, 6e Teacher‘s Resource Manual TRM Extra: Small Group Activities

22

Related MiniCase

24

Teacher’s Resource Manual: Implementation Guide This Teacher‘s Resource Manual (TRM), supports delivery of your chosen curriculum and pedagogy.

This manual contains more than just guidance on how to cover concepts discussed in the sixth edition of Strategic Management; it also provides tips and best practices for how to utilize the full product suite (from the textbook to SmartBook® to Connect®). In addition, this manual includes a variety of supplemental teaching resources to enhance your ability to create an engaging learning experience for your students. Regardless of whether you teach in face-to-face traditional classrooms, blended (flipped) classrooms, online environments, or hybrid formats, you‘ll find everything you need in this improved resource.

The TRM follows the order of the textbook outline for each chapter and is divided into sections for each learning objective. Each section identifies the relevant PowerPoint slides from both the Lecture slides and the Supplemental Lecture slides (more on this below). This eases your preparation time for class as you can adjust slides as needed to ensure your students stay actively engaged throughout each session.

WHAT INSTRUCTOR RESOURCES ARE AVAILABLE? Within each section of the TRM you will find an assortment of examples, exercises, Connect® assignments, updates on the latest research, Strategy Smart Video discussions, and discussion questions and exercises from which you can choose to enhance your students‘ learning and engagement.

Within the Connect® Library, you will find the following: In the Test Builder tab, you can create tests from the Test Bank that can be printed or administered within your LMS. In the Instructor Resources, you can access all of the following items:       

Teacher‘s Resource Manual PowerPoints (Accessible) Application-Based Activities‘ accompanying Teaching Notes Create™ Case Support MiniCase Support Sample Syllabi Video Library 25

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Strategic Management, 6e Teacher‘s Resource Manual  

Capsim‘s Capstone Simulation and Capsim IM Image Bank (for your customized PowerPoints)

57) This Teacher‘s Resource Manual is posted by chapter.

58) Two sets of ADA-accessible PowerPoints are available with each chapter: a. Lecture slides cover chapter concepts and exhibits. b. Supplemental Lecture slides cover: i. ii. iii. iv.

Chapter Cases Strategy Highlights Implications for Strategic Leaders Strategy Smart Video selections (not part of the book, but an additional resource found here) v. Key Terms

59) Test Bank questions, found in the Library tab entitled Test Builder, are posted by chapter. You will find a variety of question types within the test bank such as Matching, Ranking, Multiple Choice, Select-All-That-Apply, True/False, Short Answer, and Essays to test student mastery across Bloom‘s Taxonomy (i.e. Understand, Apply, and Analyze).

60) Create™ Case Support (all cases are available in Create™ and selected ones in HBP) a. A case matrix that identifies the industry sector covered by each case, as well as the primary and secondary chapter alignments b. One-page case abstract for quick overview of each case c. Case Teaching Notes for instructor use only d. Case Financials in Excel files for the exhibit data in the most popular cases e. Case Strategic Financial Analysis template f. Instructions on How to Download SEC Financial Data into Excel Spreadsheets 61) MiniCase Support (all MiniCases are located in Part Four of the book) a. MiniCase Teaching Notes comprising suggested answers to the MiniCase discussion questions. In some instances, they also provide specific additional article and video resources to accompany each MiniCase.

62) Video Resources, located in the Video Library, provide links to supplemental video resources to accompany both the MiniCases and full-length Create™ cases, as well as links to all of the assignable videos in Connect®.

63) A link to Capsim’s Capstone Simulation and a Capsim Instructor’s Manual correlated to Strategic Management is provided; this simulation allows students to apply their knowledge of key strategy concepts.

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Strategic Management, 6e Teacher‘s Resource Manual

HOW CAN SMARTBOOK® ENHANCE MY STUDENTS’ PERFORMANCE? SmartBook® is assignable through Connect®, McGraw Hill‘s online assignment and assessment system.

One of the first fully adaptive and individualized study tools designed for students, it creates a personalized learning experience, giving students the opportunity to practice and challenge their understanding of core strategy concepts. The reporting tools within SmartBook® show where students are struggling to understand specific concepts.

Typically, SmartBook® is assigned by module (chapter), and instructors can set which learning objectives to cover as well as the number of probes the student will see for each assignment. Instructors also set the number of points a SmartBook® module is worth in the course. Usually, applying a minimal number of points for completion of each module is enough to encourage students to read the chapter.

Many instructors assign these modules to be completed before the class or online session.

SmartBook® provides several diagnostic tools for instructors to gauge which concepts their students struggle to understand. Below is the set of adaptive assignment reports available in SmartBook®:      

Progress Overview: View student progress broken down by module.

Student Details: View student progress details plus completion level breakdown for each module.

Module Details: View information on how your class performed on each section of their assigned modules.

Practice Quiz: This gives you a quick overview of your students‘ quizzes results.

Missed Questions Metacognitive Skills

By selecting ―Module Details‖ the instructor finds the results for the students in the class overall. These details reveal where in the chapters students might be struggling. The module gives the chapter section, average time spent, average questions per student correct/total, and the percentage of correctness (number of assigned items). Information about the most challenging sections for students can help instructors refine the focus of the next classroom or online session.

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Strategic Management, 6e Teacher‘s Resource Manual For more detailed analysis, SmartBook® captures students‘ confidence in their competency using the ―Metacognitive Skills‖ report. Below (a recreation of the Metacognitive Skills report), we find the second student is confident and mostly correct (91% in the correct & aware column) while the first student ―doesn‘t know what they don‘t know‖ (39% in the far-right column).

STUDENT

Student 1 Student 2 Student 3 Student 4 Student 5 Student 6 Student 7 Student 8 Student 9 Student 10

CORRECT and AWARE 61% 91% 81% 83% 76% 66% 77% 91% 93% 70%

CORRECT and UNAWARE 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

INCORRECT INCORRECT and AWARE and UNAWARE 0% 39% 3% 5% 0% 19% 0% 17% 3% 21% 9% 25% 3% 20% 2% 7% 2% 5% 6% 25%

APPLICATION EXERCISES, QUIZZES, AND TEST BANK What resources are available at the book level?

Connect® offers a wealth of content for both students and instructors. Application Exercises require students to apply key concepts to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor. Before getting into chapter-level assignments, let‘s look at the book-level assignments available.

Four exercises are available for instructors to assign beyond the chapter materials. These are 1) MiniCase Case Analyses, 2) Case Exercises, 3) Financial Ratio Reviews, and 4) MyStrategy exercises.

The Financial Ratio Reviews and MyStrategy exercises comprise our new Student Primer in Connect.

33) To encourage analytical thinking, each MiniCase from Part Four of the book is also an assignable application exercise (MiniCase Case Analysis). Each MiniCase is followed by four to five multiple-choice questions that assess students‘ understanding of the key issues presented in the MiniCase.

34) Case Exercises focus on the key symptoms and influences of a problem a firm might be facing, followed by a series of questions that help students understand how the firm eventually achieves a solution to that problem (or asks students to suggest a solution).

28 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual 35) Financial Ratio Reviews give students the opportunity to further hone their financial analysis skills; review exercises cover each type of financial ratio (activity, leverage, liquidity, market and profitability).

36) MyStrategy exercises for each chapter provide direct personal applications of strategy concepts to careers and lives to help students internalize the content.

What resources are available for each chapter and how should I integrate them in my course?

Consider assigning one or two Application Exercises per chapter. They are built around chapter learning objectives, so the instructor can choose based on their focus for each specific chapter. Several types of application exercises are available in each chapter. The newest additions are our Animated Videos, comprising three- to four-minute videos on key concepts or concepts that tend to challenge students the most. Each animation is accompanied by three to four multiple-choice questions to check student attention and comprehension. Comprehensive Case Analyses and our new On-Location Video Cases feature firms and industries different than those discussed in the textbook and provide relevant, topical information for students. Finally, Click-and-Drag exercises help students actively demonstrate their understanding of the associated learning objectives. Application Exercises can be assigned as preparatory exercises due before class (this is especially good for flipped classrooms), or after class as concept comprehension checks. Applications Exercises will generally be assigned as homework or practice as part of the overall class grade. A general rule of thumb would be to make application exercises worth 5 to 10 points each since these require time and thought.

To find the Applications in Connect®, go to ―Add Assignment‖ and then select ―Question Bank.‖ Application Exercises are organized by chapter. Instructors have the option to select for one attempt only, but they may want to give students unlimited or multiple attempts on the first few assignments to give students a chance to learn and navigate the system. (As the course progresses, instructors may want to tighten up the time on task and reduce the number of attempts to complete each exercise).

Chapter quizzes and full chapter test banks are available for assignment, and like the Application Exercises, are organized by chapter. The value applied to each question should be relatively low because numerous questions are usually assigned for each chapter. As such, make these questions worth 1 or 2 points each. The feedback given to students is time-flexible. Selecting feedback to be displayed after the assignment due date helps to keep students from giving the correct answers to other students while the questions are still available. For this reason, it is suggested that no feedback to quizzes and test bank exams be made available until after the assignment is due.

When should I assign these digital components?

To fully utilize the power of the digital components, instructors will often assign the SmartBook® reading and adaptive learning probes before class meets. Application Exercises can be completed either before or after class; if they are completed before class, they can sometimes serve as good springboards for class discussions. The chapter quiz makes a good check on comprehension of the material and may work best if assigned after each class period. The test bank serves as a good resource for building midterm or final exams.

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Strategic Management, 6e Teacher‘s Resource Manual More detailed information on SmartBook® and Connect® is available through several resources at McGraw Hill. A good starting point is your local Learning Technology Representative, who can be found here: http://www.mheducation.com/highered/platforms/connect/features-educators.html

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Strategic Management, 6e Teacher‘s Resource Manual

COURSE PREPARATION Helpful Suggestions Regarding Assignment Policies: Connect® gives instructors a wide array of flexibility in making assignments and creating grading policies. Instructors may choose to: 

assign as many assignments as appropriate given the level and time commitment expected for the class,



determine point values for each question/application that works within the total course percentages,



make available multiple attempts per assignment with options of accepting the highest score or averaging all the attempts together (several attempts are particularly good for homework assignments),



deduct points for late assignment submissions (percentage deduction per hour/day/week/etc.) or create hard deadlines thus accepting no late submissions,



show feedback on application/questions immediately upon submission or at the time the assignment is due for the whole class, create new assignments or questions from scratch, or edited versions from a variety of provided resources.

Throughout the TRM for each chapter, we will integrate materials from the Lecture PowerPoint slides, Supplemental Lecture slides, Connect® Application Exercises, and MiniCases. This integration of resources will allow for a cohesive presentation of the relevant resources at your disposal, helping you to convey these topics effectively and efficiently to your students.

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Strategic Management, 6e Teacher‘s Resource Manual

CHAPTER 9 Learning Objectives 9-1

Apply the Build-Borrow-Buy framework to guide corporate strategy.

9-2

Define strategic alliances, explain why firms enter into them, and summarize why they are important to implement corporate strategy.

9-3

Describe three alliance governance mechanisms and evaluate their pros and cons.

9-4

Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage.

9-5

Differentiate between mergers and acquisitions, and explain why firms use them to execute corporate strategy.

9-6

Define horizontal integration and evaluate the advantages and disadvantages of this option to execute corporate-level strategy.

9-7

Explain why firms engage in acquisitions.

9-8

Evaluate whether mergers and acquisitions lead to competitive advantage.

In this chapter, we study the corporate strategy of mergers, acquisitions, and strategic alliances. We also look at horizontal integration and the three different governance mechanisms for managing alliances.

We begin the chapter with a discussion of the practical application of the Build-Borrow-Buy framework.

Firms can grow by using mergers and acquisitions (M&A); however, M&A requires a high degree of dedication of resources and managerial changes, which may induce inflexibility. Strategic alliances provide alternatives for firms‘ diversification objectives because they allow firms to focus on their core competencies while outsourcing non-core activities to partners.

A chapter opening case on Lyft and two strategy highlights are included in the chapter for tangible applications of the theoretical frameworks discussed.

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Strategic Management, 6e Teacher‘s Resource Manual

Text Chapter Contents Chapter Case 9: Little Lyft Gets Big Alliance Partners and Beats Uber in Going Public 9.1 How Firms Achieve Growth (LO 9-1) CONNECT® INTEGRATION Whiteboard Video: Build-Borrow-Buy Framework 9.2 Strategic Alliances (LO 9-2, LO 9-3, LO 9-4) Strategy Highlight 9.1: How Tesla Used Alliances Strategically CONNECT® INTEGRATION Matching/Multiple Choice: Strategic Alliances CONNECT® INTEGRATION Click & Drag: Alliance Governance Mechanisms CONNECT® INTEGRATION Case Analysis: Starbucks—Success with Alliances and Partnerships 9.3 Mergers and Acquisitions (LO 9-5, LO 9-6, LO 9-7, LO 9-8) Strategy Highlight 9.2: Kraft Heinz: From Hostile Takeovers as Specialty to Eating Humble Pie CONNECT® INTEGRATION Multiple Choice: Horizontal Integration CONNECT® INTEGRATION Multiple Choice: Horizontal Integration through Mergers and Acquisitions 9.4 Implications for Strategic Leaders ChapterCase 9 / Part II CONNECT® INTEGRATION Comprehension Case: Little Lyft Gets Big Alliance Partners and Beats Uber in Going Public

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Strategic Management, 6e Teacher‘s Resource Manual

Chapter Teaching Resources SECTION

Title

RESOURCE TYPE

CHAPTERCASE 9

Little Lyft Gets Big Alliance Partners and Beats Uber in Going Public

9.1: How Firms Achieve Growth Laurence Capron on Corporate Growing Pains: Build, Borrow, or Buy?

Online Video (9 mins)

Build-Borrow-Buy Framework

Connect® Whiteboard Video

Small Group Exercise: Build, Borrow, or Buy for small firms

TRM Extra

Walmart CIO: We Picked Microsoft for Huge Cloud Deal

Online Forbes article

Toyota & Tesla Partnership

Online Video (5 mins)

Daimler & Tesla Partnership

Online Video (7:39 mins)

Strategic Alliances

Connect® Matching/Multiple Choice Exercise

Good Business Brew: Ratan Tata, Howard Schultz on Starbucks JV

Online video (8 mins)

Starbucks: Success with Alliances and Partnerships

Connect® Case Analysis

Alliance Governance Mechanisms

Connect® Click & Drag Exercise

BB&T to Buy SunTrust in Largest Bank Deal Since the Financial Crisis

WSJ Article

Hospitals Merged. Quality Didn‘t Improve

WSJ Article

Horizontal Integration

Connect® Multiple Choice Exercise

9.2: Strategic Alliances

9.3: Mergers and Acquisitions

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Strategic Management, 6e Teacher‘s Resource Manual Horizontal Integration through Mergers and Acquisitions

Connect® Multiple-Choice Exercise

From Toxic to Turnaround: Bayer‘s CEO Fights to Fix What He Broke

WSJ Article

Ethical/ Social Issues: Verizon/Yahoo

TRM Extra

Winners Curse at Gourmet Adventures

Online class activity

Small Group Exercise: Hostile Takeovers

TRM Extra

Microsoft's Newest Internet Browser Is Fast and Finally Does the Things that Makes Google's Chrome So Popular

Online article

MiniCase 9: LVMH Acquires Tiffany: The American Jeweler Learns How to Speak French

Rothaermel Textbook

Little Lyft Gets Big Alliance Partners and Beats Uber in Going Public

Connect® Comprehension Case

9.4: Implications for Strategic Leaders

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Strategic Management, 6e Teacher‘s Resource Manual

Overview of the Chapter 9.1

How Firms Achieve Growth In Chapter 8, we discussed why firms need to grow. In this chapter, we look at the question of how firms grow. One way to describe the pathways of growth can be framed as the BuildBorrow-Buy-framework. Exhibit 9.1 displays the framework for guiding corporate strategy.

Determining the best option requires examining the factors of relevancy, tradability, closeness, and integration. Each of these aspects are explored in some detail in this section.

9.2

Strategic Alliances A strategic alliance can be viewed as a middle ground between the make or buy positions of the growth framework—examining the reasons for and types of strategic alliances are critical to understanding the leadership levers available in strategy formulation and implementation. The reasons that a firm might enter a strategic alliance include: strengthen competitive position, enter new markets, hedge against uncertainty, access critical complementary assets, and learn new capabilities. Strategy Highlight 9.1 explores the use of strategic alliances by Tesla. Alliances by firms that are both competitors and collaborators is termed co-opetition. Alliances can be structured in several ways. Three types of alliances are non-equity, equity and joint ventures.

Each is discussed in this section. Closing out this section is a discussion of how to make alliances work once they are in place.

9.3

Mergers and Acquisitions One path to achieving growth follows the path of horizontal integration. Often in the general (and even in the business press), the phrase mergers and acquisition is used interchangeably – as if there is little difference in how two (or more) firms become one. A merger involves two independent firms that combine to create a single entity. In an acquisition, one firm buys or takes over. Sometimes it is easy to differentiate the form of combination. For example, when Amazon bought Whole Foods, there was no question that it was an acquisition. Other times are not as obvious—in the new banking entity of Truist, did they merge or was SunTrust bought by BB&T? Exhibit 9.5 explores the sources of value creation and costs. The reasons for a corporate acquisition can be found within these reasons: access to markets and distribution channels, access to a new capability or competency, and strategic pre-emption. Each is discussed in this section. Strategy Highlight 9.2 examines the aggressive acquisitions of Kraft through the years and how the approach has led to several challenges for the firm.

9.4

Implications for Strategic Leaders Strategic decision makers understand the need for a firm to grow—especially those that are publicly traded companies. In considering horizontal growth, leaders must consider the governance possibilities of strategic alliances and mergers and acquisitions. Leaders must consider the right corporate structure for managing such organizational changes. Often a relational capability at the corporate level, rather than from a business unit, is the preferred way to build capabilities for the firm.

5

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Strategic Management, 6e Teacher‘s Resource Manual

Classroom Outline ChapterCase 9 Little Lyft Gets Big Alliance Partners and Beats Uber in Going Public The opening ChapterCase discusses how Lyft is building alliances with important partners such as GM and Waymo (owned by Alphabet/Google) to compete with the much larger ride hailing service Uber.

Lyft successfully completed its initial public offering (IPO) before Uber. Lyft hopes to use the superior technology of its partner firms to be more competitive with Uber particularly in autonomous driving developments in the years to come. The results of the competition between Uber and Lyft are still being determined.

INSTRUCTOR SUPPLEMENT SLIDES 3

ChapterCase 9 Part II The closing ChapterCase provides information on the strategic alliances that Lyft created with GM and Waymo. In looking at the confluence of capabilities, GM delivers core-competencies in manufacturing cost-competitive and reliable cars at large scale. Lyft supplies the data harvested from the second largest global transportation network. Waymo provides early leadership in autonomous vehicle development.

ChapterCase 9 Discussion Questions 1. Describe the reasons Lyft entered strategic alliances with GM and Waymo. Are some reasons more important than others? Why or why not? Explain.

Lyft is far behind arch-rival Uber in both size and technological investments in autonomous driving.

Access to new capabilities is likely a key reason Lyft is partnering with these larger and more established firms. They also can use the cash infusion to invest in their own mobile transportation infrastructure. Perhaps less importantly, these partners may help Lyft grow faster both domestically and globally with their enormous installed base of cars and dealerships.

2. GM invested $500 million in Lyft in 2016. What are some possible reasons GM entered an equity alliance with Lyft? Are there any reasons GM would prefer Lyft over Uber as an alliance partner?

GM does not want to get left behind if the developed world vehicle markets shift from personal ownership to shared or rental ownership. While they are well established, the digital and sharing environments of the GenZ customers may not fit with GM (or Ford‘s) current business model. They can use these partnerships to leverage their fleet management experience for large, shared driving fleet cars 6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual and trucks. GM may have steered away from Uber due to numerous regulatory, managerial and espionage issues that have come to light with Uber in 2017. The founding CEO was replaced in the summer of 2017 due to several of these issues. Given these multiple issues and controversies, Lyft may have appeared to be a ―safer‖ bet than Uber. It may also be worth considering the power dynamics.

Given Lyft‘s smaller stature than Uber, Lyft may have appeared to be a more controllable partner, given GM and other older, established partners better control. Again, these may make Lyft a less risky partner.

3.

What are some possible reasons Waymo entered an alliance with Lyft? Are there any reasons Waymo would prefer Lyft over Uber as an alliance partner?

Waymo seems to be well advanced with autonomous driving prototypes and software but is lacking a network to get its product out in large volumes for further improvements. One can imagine using Waymo driving algorithms in GM and Ford cars that are networked together using the Lyft mobile transportation system. Though Google has a prior investment in Uber, there is a lot of ill-will between the firms with Uber hiring away some key personnel and perhaps stealing important Google proprietary information in 2016. Thus Waymo/Google would be interested in another partner going forward in this market. The reason may be as simple as ―revenge‖ against Uber by going to their nearest competitor.

Additionally, for the same reasons mentioned in the previous response, Lyft may appear to be a less risky, safer partner than Uber. Finally, if Waymo is indeed interested in forming an alliance with a ridesharing company, are there any other suitable alternatives? The choice of Lyft may not be much of a choice – Lyft may be the only other viable alliance partner in the industry.

4.

Uber is a much larger and more valuable firm than Lyft. Uber is also more diversified in that it offers services beyond ride-hailing. Indeed, its initial service of ride-hailing now generates less than 50% of Uber‘s revenues, while Uber Eats (food delivery) generates most of Uber‘s revenues (post-pandemic). Do you think the strategic alliances with GM and Waymo could help Lyft to overcome Uber‘s lead? Can you think of other reasons Lyft could end up as the winner in the mobile transportation network competition? Explain.

While there is a well-documented source of competitive advantage that is received by the first mover in an industry or technology, there are also many cases of first-mover fumbles. Uber has already experienced problems with ―bully boy‖ issues involving regulators that resulted in the Delete Uber movement. This resulted in an opportunity for Lyft to greatly encroach on Uber‘s market share. To achieve a sustained competitive advantage, Lyft must develop and execute other actions, such as: expanded offerings (e.g., Uber Eats), enhance its revenue model through such offerings as a subscription service and expand their app from a ―transaction service‖ to some better form of platform—enhancing the value creation for both the Lyft drivers and riders. Lyft also faces some of the same regulatory and legal issues as Uber—however, working with regulators and legislators could be beneficial for Lyft. By work with these powerful stakeholders, Lyft could help create the policies that govern the industry, providing a possible benefit. Additionally, Lyft is currently perceived as the ―less bad‖ choice in ridesharing. Continuing to develop their reputation may create brand loyalty. Finally, continuing to develop relationships with powerful partners may be the strategic move that allows them to move beyond Uber‘s performance.

5. Evaluate Lyft‘s overall alliance strategy and weight the benefits against the risks. What are some of the potential negative effects that might emerge for Lyft as part of its strategy 7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual to partner with much larger and more resource-rich companies such as Alphabet (via its Waymo subsidiary) and GM? Lyft‘s overall alliance strategy is currently beneficial. The benefits outlined in the ChapterCase (i.e., access complementary assets, strengthen their competitive position, and learn new capabilities) are things that they would not have been able to do on their own in a reasonable time frame. Their selection of partners also seems prudent. Both Waymo (Alphabet) and GM are mature, established firms with good performance. One risk for Lyft appears to stem from the power difference between themselves – a newer start-up with marginal resources—versus their older established partners. Firms with more resources could put pressure on their partners, or these power partners could work to extract the most value for their own company. Of even greater concern is that the thing that Lyft brings to the table (ridesharing + mobile-transportation network) could be copied or replicated by these larger firms. A firm like Waymo with an incredibly talented human capital base could use what they learn from Lyft to create their own network, algorithms, or other related technologies. These powerful firms would no longer need to be in an alliance with Lyft, leaving Lyft in the dust.

DISCUSSION TOPIC In September 2017, Lyft announced a partnership with Ford Motor Co. The agreement will let Ford vehicles communicate with Lyft‘s ride hailing app. Lyft also has a partnership with Jaguar Land Rover in addition to the ones noted in the ChapterCase 9. (See ―Ford and Lyft Sign Driverless-Car Agreement,‖ WSJ.) There is not much publicly available information on the progress of the Lyft and Ford alliance more recently though there are some efforts for Ford, Lyft and Uber to all share data to mitigate traffic congestion which is a concern in several dense urban areas.

For a litany of the problems faced by Uber throughout its history see ―49 of the biggest scandals in Uber‘s history‖ from Business Insider. Though the pace of problems has slowed since the departure of founding CEO Travis Kalanick, there are still personal and data safety challenges for the firm.

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9.1 HOW FIRMS ACHIEVE GROWTH LO 9-1 Apply the Build-Borrow-Buy framework to guide corporate strategy.

LECTURE SLIDES 3–9 EXAMPLES HTC‘s diversification strategy to enter the virtual reality industry illustrates the propensity of tech firms to diversify into adjacent industries when growth tapers off in a more mature tech industry. (See ―HTC Wanders into Virtual Reality Gear,‖ WSJ.) HTC is entering this industry through organic growth (―Build‖), while Facebook is entering this industry via the acquisition of Oculus VR (―Buy‖). Step through Exhibit 9.1 and have the students discuss why each firm has a different approach to entering the same industry.

Some firms possess better capability than others in using M&As to establish a competitive edge such as Cisco acquiring Linksys and WebEx to enjoy complementary assets. Draw students‘ attention to the fact that acquisition negotiation, due diligence review, and integration costs and leadership are capabilities that firms learn with experience. A firm like Cisco has extensive experience with acquisitions, whereas a firm like Shell taking on its first large acquisition with British Gas takes on a larger risk. (See ―BG Deal to Test Shell‘s Integration Skills,‖ WSJ.) DISCUSSION TOPIC If you are planning to re-create Exhibit 9.1 on the board in your classroom, here is an alternative way to construct it for easier board work.

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STRATEGY SMART VIDEO INSTRUCTOR SUPPLEMENT SLIDE 16 In the video link in this slide, Prof. Laurence Capron discusses the borrow-build-buy framework in this nine-minute video.

INTEGRATION Whiteboard Video: Build-Borrow-Buy Framework Corporations feel pressure to grow, but to do that with strategy in mind, they must determine the best way to gather more resources. This animated video case analysis provides an overview of the framework. 

Difficulty: Medium  Blooms: Apply

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity around the use of build-borrow-or-buy framework for a small business.

9.2 STRATEGIC ALLIANCES LECTURE SLIDES 10–17 LO 9-2 Define strategic, explain why firms enter into them, and summarize why they are important to implement corporate strategy.

A strategic alliance is a voluntary arrangement between firms. It is a relational view of the firms‘ competitive advantage. Firms enter strategic alliances for the following reasons: strengthen competitive position, enter new markets, hedge against uncertainty, access critical complementary assets, and learn new capabilities. Strategic alliances allow firms to enjoy flexibility, which is not granted from M&As. By cooperating and collaborating with partners, firms co-evolve with each other and form what Michael Dell called a ―virtual organization.‖ DISCUSSION TOPIC 10 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual In the summer of 2018, Walmart and Microsoft entered a strategic alliance whereby Walmart‘s ecommerce utilizes the Microsoft Azure cloud platform. What advantages does Microsoft receive from the agreement? One explanation is likely economies of scale with such a large new customer. It is possible they can embed Office applications within the Walmart systems. What alternatives did Walmart have to this alliance? Walmart could have built in-house capacity or looked at other cloud vendors. Are there any circumstances under which that Walmart would or should consider Amazon Web Services (AWS)? It is hard to see why Walmart would want to run their cloud infrastructure and data with their biggest competitor. This situation is an example of why Jeff Bezos is facing pressure to split AWS into a separate business. (For more information on the alliance, see ―Walmart CIO: We Picked Microsoft for Huge Cloud Deal,‖ Forbes).

CLASS EXERCISE ―Global Alliance Game‖ is an exercise that demonstrates many of the principles of strategic alliances. It can be found on Russ Coff‘s Carpenter Strategy Toolbox site. This site is a great repository of strategy related classroom activities and videos available for free to education professionals.

Strategy Highlight 9.1 How Tesla Used Alliances Strategically Click here for a summary of the Strategy Highlight covering the intelligent way Tesla has used alliances with Daimler, Toyota, and Panasonic to greatly impact its success.

INSTRUCTOR SUPPLEMENT SLIDE 5: HOW TESLA USED ALLIANCES STRATEGICALLY STRATEGY SMART VIDEO INSTRUCTOR SUPPLEMENT SLIDE 14 This five-minute video discusses the early partnership between Tesla and Toyota. It‘s a complement to Strategy Highlight 9.1.

STRATEGY SMART VIDEO INSTRUCTOR SUPPLEMENT SLIDE 15 This seven-minute video discusses the early partnership between Tesla and Daimler. It‘s a complement to Strategy Highlight 9.1.

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INTEGRATION Matching/Multiple Choice: Strategic Alliances This activity builds student comprehension of the role of strategic alliances in today‘s business environment. The student will read the brief case and then move the labels listing reasons to have a strategic alliance to their correct locations. Then the student will complete a set of three questions to further build understanding.

The instructor can build on these concepts by having student groups choose their own large firms and do some Internet research on the alliances their firm is engaged in. Ask the students to determine what value these alliances and partnerships may provide for competitive advantage. 

Difficulty: Medium  Blooms: Analyze

LO 9-3 Describe three alliance governance mechanisms and evaluate their pros and cons.

STRATEGY SMART VIDEO INSTRUCTOR SUPPLEMENT SLIDE 13 The Tata/Starbucks example in this slide‘s video is an example of a cross-border alliance. It can be used to start a discussion of the advantages that the JV brings to each firm.

DISCUSSION TOPIC Partner selection, alliance design, and post-formation alliance management are essential to a successful alliance. Many alliances fail due to problems in post-formation management.

IKEA is the world‘s largest furniture retailer. It has many non-equity alliances with suppliers and manufacturers around the world. IKEA also makes strategic use of non-equity alliances and stakeholder partnerships to participate in finding solutions to social and environmental challenges. For example, IKEA has had longstanding relationships with Save the Children, UNICEF (United Nations Children‘s Fund), and the WWF (World Wildlife Fund, the global conservation organization). Ask students to go to IKEA‘s website to find more information about these and other active partnerships. In what ways does IKEA participate? What projects have shown success? How do these partnerships relate to maintaining IKEA‘s competitive advantage as the world‘s largest furniture retailer? Another way to ask this is to determine what each partner gets from this alliance partnership. This discussion can tie into corporate social responsibility and firm value discussions from earlier in the course. In particular, when asking about project success, press students to define what constitutes success for IKEA and success for the non-profit partner. What resources and capabilities does each party bring to the alliance? Refer to

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Strategic Management, 6e Teacher‘s Resource Manual Exhibit 9.4 and ask students to consider which of these governance considerations would be most important to this non-equity alliance.

LO 9-4 Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage.

Students need to understand that any relationships must be managed well to prolong the life expectancy of the relationship. One (possibly humorous) way to introduce this topic is to ask students what they look for in a partner. Undergraduate students can make the connection that what makes a good personal relationship partner also has parallels into what makes a good business alliance partner. Careful selection of partners to see if they have cultural fit, complementary assets, and willingness is important.

Once entered, the alliance relationship, firms need to establish trust by acquiring information and knowledge from each other so participating firms will have the chance to enhance their understandings of one another.

International Paper‘s strategic alliance with a Russian partner in Siberia some years back still offers a good opportunity to discuss the advantages of having local partners when entering a new, unfamiliar geographic territory. Ask students what benefits this investment brings to Russia, to the Russian partners, and to International Paper. In what ways are the interests of the partners aligned? What factors should IP consider in managing the alliance? (See ―International Paper‘s big pulp bet hits a frosty Siberia,‖ WSJ.) The example also illustrates operating challenges in one of the important BRIC countries. You could follow this video with a discussion about how a Russian partner might help manage and mitigate some of these risks. And on a more current note, this topic could prompt a discussion of what businesses currently aligned with Russia and Russian companies will do given the current fighting in Ukraine. Most businesses have severed ties to Russia and their Russian business counterparts, while Russia has created an interesting solution to the vanishing businesses: Exxon Escalates Dispute with Russia Over Barred Exit From Giant Oil Project; Starbucks Replacement Opens in Russia With Similar Look

INTEGRATION Case Analysis: Starbucks—Success with Alliances and Partnerships This case analysis explores Starbucks‘ extensive use of alliances in running and growing its business.

The case is a complement to the textbook discussion of Eli Lilly‘s skills in alliance management.

Students will read the case and then answer the four questions following it.

Follow-Up Activity: The instructor can expand on the concepts from this case analysis by having students discuss drivers that a successful alliance management requires. 

Difficulty: Medium

 Blooms: Apply

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INTEGRATION Click & Drag: Alliance Governing Mechanisms This activity will help students understand the pros and cons of each of the three alliance types. 

Difficulty: Medium

 Blooms: Apply

9.3 MERGERS AND ACQUISITIONS LECTURE SLIDES 18–22 LO 9-5 Differentiate between mergers and acquisitions, and explain why firms would use either to execute corporate strategy.

Although the terms are used interchangeably, mergers and acquisitions refer to two distinct activities.

An acquisition is the purchase or takeover of one company by another and can be friendly or unfriendly.

Mergers occur when two independent companies join to form a combined entity. Firms use M&A activity for competitive advantage when they possess a superior relational capability, which is often built on superior alliance management capability.

EXAMPLES BB&T‘s merger with SunTrust Bank completed regulatory approvals in December 2019. The deal was all stock and creates the sixth largest U.S. retail bank. It is the first major merger in banking since the financial crisis in 2008. Though BB&T initiated the deal, the firms are reasonably close in size and the new firm (to be called Truist) will rotate the CEO spot between the two firms. The head of BB&T will be CEO through 2021 and then the current president of SunTrust (who will be serving President and COO) will step into the CEO position in 2021. The firms said technology played a large role in the decision to merge. Pooling their assets will allow the new, larger firm to compete with better digital products and services. (An article with some background on the merger is: ―BB&T to Buy SunTrust in Largest Bank Deal Since the Financial Crisis,‖ WSJ.) Government regulation and its associated costs can also drive consolidation. Such is the case with the U.S. Affordable Care Act. The regulatory burdens from this legislation have driven many small acquisitions, as physicians sell their private practices to hospitals, and large horizontal integrations, among both hospitals and insurers. (See ―Health-Care Providers, Insurers Supersize,‖ WSJ.) Market and government uncertainty around the U.S. healthcare system is accelerating the pace of consolidation throughout many parts of the United States. (See ―Don‘t Get Left Behind in Health-Care Deal Frenzy,‖ WSJ.) However though improving care quality was a goal of much of this industry consolidation, a study released in late 2019 showed 250 acquired hospitals did not have performance improvements in health care provided. (See ―Hospitals Merged. Quality Didn‘t Improve,‖ WSJ.) 14 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual LO 9-6 Define horizontal integration and evaluate the advantages and disadvantages of this option to execute corporate-level strategy.

DISCUSSION TOPIC In a previous discussion, we looked at the strategic alliance formed between Walmart and Microsoft.

Here we add the 2016 purchase of Jet.com by Walmart. In June 2019 Walmart announced it was merging the remaining Jet.com staff into the Walmart operation (which is run by the former Jet.com CEO). What capabilities does Jet bring to Walmart? Analysts generally think the purchase helped propel Walmart further into the online business for more effective competition with Amazon. (See ―Walmart to Fold Jet.com Staff Into Rest of Its E-Commerce Operations,‖ WSJ.) CLASS EXERCISE Ask students to identify a recent horizontal integration (and try to pick one that students will be interested in and familiar with. For example, the planned merger of JetBlue and Spirit airlines would be a great starting place. Then, ask them to step through the sources of value and costs in Exhibit 9.5 to evaluate the probable effects of the merger. For the JetBlue and Spirit merger example, one could argue that competitive intensity will be reduced in a number of markets in which the two firms competed, potentially increasing revenue. They should be able to reduce costs by combining operations at many airports and consolidating flights to fill them. Fans of each airline are likely to feel that differentiation is reduced, rather than increased, although frequent flyers may value the broader network. Each firm will gain access to new markets and traffic flow from the other‘s hubs. The two airlines had very different cultures, so integration problems will likely be noticeable in system failures and fractious unions.

INTEGRATION Multiple Choice: Horizontal Integration This exercise covers the textbook example firms and four of the benefits of using horizontal integration, including mergers and acquisitions. Then related questions follow. Students need to be familiar with textbook Section 9.3 before proceeding with this activity.

Follow-Up Activity: The instructor can expand on the concepts from this exercise by having classroom discussions about the benefits and drawbacks of some horizontal integration examples. Suggest a discussion on the Live Nation/Ticketmaster merger. Students often frequent concerts and they may have some sharp opinions on this near monopoly in ticket purchasing systems. 

Difficulty: Medium

 Blooms: Apply

integration problems will likely be noticeable in system failures and fractious unions.

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INTEGRATION Multiple Choice: Horizontal Integration through Mergers and Acquisitions This exercise helps students to understand the differences between horizontal integration and how companies can strengthen their competitive advantage through mergers and acquisitions. 

Difficulty: Medium  Blooms: Apply

LO 9-7 Explain why firms engage in acquisitions.

EXAMPLES Earlier versions of the textbook discussed the 2015 acquisition of Syngenta by Monsanto. When we fast forward, we find that Monsanto itself has been acquired and the century old brand will largely disappear.

Bayer, the German drugmaker and chemical company is the new corporate owner. From the initial agreement in 2016 through the 2018 close of the deal, this $66 billion acquisition looked like a winner.

During the acquisition phase, Bayer sought to use the name change to distance themselves from the legacy of ―Roundup‖ and ―GMO.‖ The effort does not appear to be sufficient to avoid controversy. For example in August 2019, ―How Bayer-Monsanto Became One of the Worst Corporate Deals—in 12 Charts,‖ WSJ discusses the problems Monsanto brought into the Bayer purchase. By February of 2020 there are some rays of hope the deal may have some longer term benefits for the firm as discussed here: ―From Toxic to Turnaround: Bayer‘s CEO Fights to Fix What He Broke,‖ WSJ. Can Bayer extract a long-term advantage out of this acquisition? If so, what actions does the company need to take? If the acquisition is a loser, how does Bayer extricate itself? In more current headlines, it appears that the external environment has created an opportunity for Bayer (and would be an excellent way to link back to Chapter 3): Bayer‘s Troubled Monsanto Megadeal Finally Shows Promise.

Strategy Highlight 9.2 Kraft Heinz: From Hostile Takeovers as Specialty to Eating Humble Pie Click here for a summary of the Strategy Highlight covering a series of acquisitions by Kraft that have contributed to poor performance more recently.

INSTRUCTOR SUPPLEMENT SLIDE 6: KRAFT HEINZ: FROM HOSTILE TAKEOVERS AS SPECIALTY TO EATING HUMBLE PIE CLASS EXERCISE Ask students to research Hershey in China, reviewing Hershey‘s recent candy product launches in China and compare them to Mondelēz China‘s new Oreo products and Cadbury products. National and international news outlets have carried stories on the product launches. Cadbury has much more expertise than both Hershey and Kraft in international marketing. Can they see evidence of Mondelēz 16 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual benefiting from this capability? You may want to refer back to this discussion in Chapter 10 when you discuss localization.

Based on a brief review of news articles, Hershey has had a disappointing start in a tough Chinese market. The uniquely American candy bar is having trouble finding an audience in a wave of other competitors. Compared to Mondelez, Hershey is struggling. Mondelez has not always had an easy time in China, but they have managed to rethink their products for the Chinese market. With a careful rethinking of the product and new marketing campaigns that teach the Chinese market how to eat an Oreo cookie in the ―American style,‖ they have seen much greater success. Have students work to find articles that detail the journey of both brands in China. Here are some examples to get started: ―Hershey to Change Tack in China‖; ―Rethinking the Oreo for Chinese Consumers.‖

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for some thoughts on a further discussion of the implications of Verizon‘s purchase of Yahoo.

LO 9-8 Evaluate whether mergers and acquisitions lead to competitive advantage.

STRATEGY SMART VIDEO In the video link in this slide, Prof. Laurence Capron discusses evaluating M&As in this two-minute video.

DISCUSSION TOPIC An important part of the dynamics inherent to a change of strategy for a large firm is the fact that it can change the structure of the industry. The obvious changes that students will see quickly are reduced rivalry and reduced buyer power. Consolidating two major firms also reduces supplier power. What they may not understand is that anti-monopoly agencies, such as the FTC and the European Monopolies and Merger Commission, will often force structural changes to protect consumers that create opportunities for rivals. Like in chess or war, successful merger strategy involves envisioning the responses of rivals and governments in response to your actions. You need to determine which assets you might be forced to give up or sell to rivals, how that will weaken you, and how it will strengthen one or more rivals. An example is AB InBev‘s acquisition of SAB. Due to its large market share with Budweiser, AB InBev was required to sell its majority stake in MillerCoors to Molson. This action has strengthened Molson‘s market share in the United States, doubled the firm‘s size, and gave Molson control over Miller‘s main brand in the huge U.S. market. (See ―AB InBev Takeover of SABMiller Would Realign Global Beer Industry,‖ WSJ, for the opportunities created for InBev; ―Big Beer Merger Also Benefits Molson,‖ WSJ, for the opportunities created for Molson.) AB InBev also agreed to sell several brands in Europe and Asia to make the deal come together. (See ―SABMiller, AB InBev Shareholders Approve $100 BillionPlus Merger,‖ WSJ.) In 2020 InBev is focusing on improved operations with the use of technology such as machine learning (aka artificial intelligence). (See ―Anheuser-Busch InBev‘s BrewRight: How It 17 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual Works,‖ WSJ.) and buying some smaller more craft breweries to add to its already vast collection of beers. (See ―Budweiser maker to buy Kona Brewing and more craft beers for a discount,‖ WSJ.) If you want to add some entertainment, show this list, ―How Big Will AB InBev-SABMiller Be? Here‘s All Their 158 Beers,‖ which describes 158 beers produced by the two firms before divestments.

CLASS EXERCISE ―Winners Curse at Gourmet Adventures‖ is an exercise that demonstrates the risks of overbidding for acquisitions. It can be found on Russ Coff‘s Carpenter Strategy Toolbox site along with many other ideas for classroom engagement with strategic management topics.

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity the challenges of hostile takeovers. This builds on Strategy Highlight 9.2 and the information in this chapter.

9.4 IMPLICATIONS FOR STRATEGIC LEADERS INSTRUCTOR SUPPLEMENT SLIDE 8 EXAMPLES In February 2018, the history of co-opetition alliances expanded into the cloud. The two largest providers of smartphone operating systems, Apple (iOS) and Google (Android), announced an alliance in which Apple would utilize the Google Cloud Platform to host its iCloud storage service.

This alliance is an interesting vehicle as it has the juxtaposition of the Apple/Microsoft alliance for the Office products (as opposed to Google Apps) and the recent announcement by Microsoft that it was switching to Google‘s Chromium open-sourced platform as the basis for its own Edge browser. (See ―Microsoft‘s newest internet browser is fast and finally does the things that makes Google‘s Chrome so popular,‖ Business Insider.)

Additionally, MiniCase 9: LVMH Acquires Tiffany: The American Jeweler Learns How to Speak French is a good example of a corporate strategy of acquisition. With the acquisition, LVMH hope to accomplish three things: 1) unlock more value from Tiffany within their conglomerate, 2) strengthen LVMH‘s presence in the United States, and 3) blocking any rival‘s attempt at acquiring Tiffany‘s. Every MiniCase has assignable McGraw Hill Connect® case questions available.

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INTEGRATION Comprehension Case: ChapterCase—Little Lyft Gets Big Alliance Partners and Beats Uber in Going Public Here, we provide both Parts 1 and 2 of this case, accompanied by short-answer questions that students can complete and submit. Due to the nature of these open-ended questions, they require manual grading. 

Difficulty: Medium  Blooms: Apply

Strategy Highlights Strategy Highlight 9.1 How Tesla Used Alliances Strategically When Tesla started selling its all-electric Roadster in 2008, it had neither a market nor legitimacy. Tesla employed a strategy of turning potential competitors into alliance partners. Three key alliances were with Daimler, Toyota and Panasonic. Tesla got a much-needed source of cash from Daimler before their IPO. Daimler also helped Tesla with some engineering issues in those early days. Toyota provided quite different resources. Tesla obtained a factory from Toyota that was near to the company headquarters in northern California. Panasonic made a key agreement with Tesla to jointly invest in new lithium-ion battery factories. These batteries are key not just to the electric cars that Tesla produces, but also to the energy storage vital for the integrated energy company Elon Musk wants to remake of Tesla going forward. Leveraging alliances with competitors critically contributed to Tesla‘s ability to overcome early challenges.

Strategy Highlight 9.2 Kraft Heinz: From Hostile Takeovers as Specialty to Eating Humble Pie This highlight discusses the history of using mergers and acquisition (especially hostile takeovers) as a key strategy in growing the firm‘s business. Kraft completed a hostile takeover of Cadbury back in 2010 and has had several failed unsolicited acquisition attempts more recently. Hershey and Unilever both successfully fought against Kraft purchase offers. The reading highlights the negative impact of illadvised acquisitions or attempts and more importantly the potentially dangerous consequences of not addressing other strategic decisions.

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my Strategy Many of us participate in one or more popular social networks online such as Facebook, LinkedIn, Instagram, WeChat, or Twitter. While you may spend countless hours in these social networks, you may not have given a lot of thought to your own network strategy.

1. Create a list of up to 12 people at your university with whom you regularly communicate (in person, electronically, or both). Draw your network (place names or initials next to each node), and connect every node where people you communicate with also talk to one another (i.e., indicate friends of friends). Can you identify strong and weak ties in your network?

This is the first step in helping students understand the formation and composition of their own social network.

What is the degree of closure in your network? The density of your network reflects the degree of closure. Network density can be calculated in three simple steps. Step 1: Create a simple matrix in which you list the names of the people in your network on both the horizontal and vertical axis. (This can be easily done in an Excel spreadsheet.) Then put an X in each box, indicating who knows whom in your network. Each x corresponds to a social tie in your network. Count the total number of Xs in your matrix.

Let‘s assume X = 8. Step 2: If your network contains 12 people (including yourself), N = 12. The maximum network density is calculated by the following formula: [N x (N 2 1)] / 2. If your network size is 12, then your maximum network density is [12 3 (12 2 1)] / 2 5 66. This is the maximum number of ties in your network when everybody knows everybody. Step 3: To calculate your actual network density, divide X by N: Network density = (X/N). In the example with 8 ties in a network of 12 people, the network density is 0.67. The closer this number is to 1, the denser the network.

The students will follow the steps to calculate their network density.

Network density is bound by 0 and 1. Is a network density that approaches 1 the most beneficial? Why or why not? Think about weak ties, which can also be indirect connections.

The student should understand that the density closer to 1 indicates that they have more strong ties in their social networks. It is still inconclusive when deciding whether it is beneficial or not. Because it might be the case that they have 12 close friends and that they only communicate with these 12 friends makes the student seem like they are living in a closed system. In such a case, it is not beneficial at all.

Students should understand the importance of weak ties.

2. Now examine your actual career-related network on a site such as LinkedIn. Are any of your connections linked? With how many alumni from your university are you linked?

These alumni can provide a source of weak ties that may help you get a foot in the door at a potential new employer if you leverage them effectively.

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Strategic Management, 6e Teacher‘s Resource Manual Ask students how they can maintain an appropriate network structure by having suitable numbers of strong ties and weak ties. How can they be active in their social networks so they can create more social capital?

Discussion Questions 1. The chapter identifies three governing mechanisms for strategic alliances: non-equity, equity, and joint venture. List the benefits and downsides for each of these mechanisms.

The answer can be found in Exhibit 9.2: Key Characteristics of Different Alliance Types. Generally, the non-equity is most flexible and easiest to exit while the joint venture is most ‗permanent‘ of the methods.

2. Alliances are often used to pursue business-level goals, but they may be managed at the corporate level. Explain why this portfolio approach to alliance management would make sense.

Individual business units will tend to focus on their ‗local‘ concerns when establishing a strategic alliance. If the corporate offices are involved, they can provide more of an overall view of the benefits and risks of a given deal. Also, the corporate offices will have more experience with alliances and M&A activity and therefore they are more likely to have enhanced capabilities to close and manage such arrangements. On the other hand, engaged business units are vital for successful implementation of these alliances. Each alliance may have a different goal or purpose, and managing these alliances at the corporate level would allow for a better assessment of how these alliances fit with the overall strategy of the firm. Additionally, firms often have multiple alliance partners to pursue their goals, and like any portfolio strategy, it allows firms to mitigate risk.

3. Given the poor track record of M&As, what explains the continuing trend for mergers and acquisitions in many industries? What steps can a firm take to improve the chances of successful M&As? There are three major reasons why we still see lots of M&As. Those reasons include the desire to overcome competitive disadvantage, superior acquisition and integration capabilities, and principal– agent problems. Principal–agent problems, as well as managerial hubris, often contribute to the poor performance of M&As. Other reasons might include the fact that firms pay a premium to merge and acquire other firms. This premium consumes too much of its internal financial resources. While much attention is focused on the initial merger or acquisition, less attention (from both the press and possibly from management) on the integration of the merger or acquisition can lead to poor outcomes. Firms must spend time in the due diligence process to select targets, and they must devote resources to appropriate integration processes to see M&A success.

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TRM Extra: Ethical/Social Questions 1. In this chapter, three main reasons are given for why one firm would acquire another. In July 2016 Verizon announced it was going to acquire Yahoo for $4.8 billion in cash. The announcement discussed Verizon‘s earlier purchase of AOL and noted Yahoo would speed up the digital advertising business. Verizon noted Yahoo has over 1 billion users globally and several premium brands in finance, news, and sports. Based on Verizon‘s information, which of the three acquisition reasons seems most prevalent?

Verizon seems to have acquired Yahoo to preempt rivals such as AT&T and even Facebook from getting access to some of the valuable content and user portals controlled by Yahoo.com (strategic preemption). Verizon also plans to use Yahoo‘s digital advertising technology to build a stronger business under its previous AOL acquisitions (access new capability or competency). Senior executives and the board thought the purchase should continue despite the breaches (belief in superior acquisition capabilities). Students may disagree with the overall value of the deal and certainly on the correct assessment of Yahoo behaviors in light of the data breaches. (see related article and video, ―Why Verizon Decided to Stick With Yahoo Deal after Big Data Breaches,‖ WSJ). Preempting rivals is likely the most popular/common response.

2. In the fall of 2016 Yahoo disclosed several major security breaches involving more than 1.5 billion user accounts. The results of these disclosures delayed the purchase by Verizon and reduced the Yahoo purchase price by at least $300 million. In June 2017 Yahoo shareholders agreed to the final sale to Verizon, nearly a year after the purchase was announced. What responsibility do firms have for the protection of customer data provided in the operation of their firm? Should Verizon have backed out of the deal with Yahoo given the scale and duration of the security issues brought to light in the fall of 2016?

Students will likely have differing opinions. More risk averse students will point to the security issues as a good reason to exit the deal. If these security issues exist, what other surprises might Yahoo hold? On the other hand, students can point to the steep discount in a more positive light. In light of so many data breaches and other security concerns (e.g., Meta‘s Cambridge Analytica scandal, Yahoo‘s data breach, LinkedIn‘s data breach), students may be very cautious about who has access to their data and how it is being protected. It would be interesting to compare the acquisition of Yahoo by Verizon to Elon Musk‘s takeover of Twitter. Concerns over data security and bots has led to Musk calling off the deal. While the story is still ongoing, have students discuss what they should happen and predict what will actually happen. See ―Does Twitter Have a Deeper Data Cybersecurity Problem? Experts Think So.‖

TRM Extra: Small Group Activities In this chapter, we studied horizontal integration and the build-borrow-or-buy framework. One industry currently consolidating is furniture manufacturing, with thousands of manufacturers and suppliers.

Manufacturers range from large recognizable brands, such as Baker, Steelcase, and La-Z-Boy, to small family-owned companies. Demand for both office furniture and residential furniture is experiencing 22 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual post-recession growth. Analysts have observed that companies are shopping for acquisitions as consumers are shopping for furniture.

Charter Capital Partners in Grand Rapids, Michigan, is a mergers and acquisitions adviser helping companies initiate, negotiate, and close deals on one company‘s purchase of another. To take advantage of the increase in M&A activity in the furniture manufacturing industry, Charter recently launched a dedicated furniture practice. Western Michigan is home to the top three office furniture manufacturers, which is a key segment of the industry. The sales of the top three make up half of the industry‘s $10 billion market.

Charter Capital Partners has hired your small consulting team to do the basic research regarding a client that has recently approached the group. The client is a small manufacturer of office furniture in a medium-sized town in Michigan. The managers are seeking advice as they decide whether to upgrade capabilities in order to expand sales, to find a partner with complementary skills, or to sell to a larger company. The owner has stated that the firm is like a family, and they feel a sense of loyalty to the workers and the community. The firm has had steady sales over its history, although it experienced a slight dip in sales during the recession. The company is aware that other office furniture manufacturers are beginning to integrate technology into the furniture. For example, one competitor is building wireless technology into desk surfaces to power several devices at one time and avoid the need to plug them in. The owner sees the integration of technology as a game changer.

1. Using the build-borrow-buy framework and other strategic concepts, develop a set of questions to ask the managers of this small business to help you gather information regarding whether to hire new employees with more sophisticated technology expertise in order to build capabilities in-house or whether to partner with another firm that already has these capabilities. Alternatively, consider information that could help the owner decide whether this is the time to sell to a larger company. Your consulting team will need adequate information to help put a value on the firm to advise Charter if/when it initiates a search for a partner or buyer.

Use Exhibit 9.1 to structure a discussion. The questions to ask the firm are listed therein. The evaluation process for a potential sale is more challenging. Students should identify the information that they would need to evaluate the firm‘s value. This should include information about the firm‘s earnings potential, what synergy opportunities it might offer to a target firm, and, importantly, the earnings multiples or acquisition premiums associated with recent acquisitions in this industry.

2.

In Strategy Highlight 9.2, Kraft is shown to be prone to using hostile takeovers. These acquisitions are completed over the objections of the acquired firm. As noted in the text, mergers and acquisitions sometimes have difficulty creating enhanced competitive advantage. In your group, discuss what additional burdens a hostile takeover must overcome to generate positive advantages for the acquiring company. How is a hostile takeover more difficult than a cooperative merger or acquisition?

The textbook notes many issues around softer skill issues such as corporate culture and alignment of corporate goals. While some firms can develop superior acquisition capabilities, with hostile takeovers these important integration issues tend to be major hurdles for the acquiring firm to overcome. The 23 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual failed acquisition of the Hershey company is a clear example of Mondelez failing to understand the ―meta-goals‖ of Hershey. The company is owned by a trust created by Milton Hershey to support a school for underprivileged and ―at risk‖ children more than a century ago. While a sale would have given a one time boost the trust‘s endowment, it would not provide the level of confidence in the support of the Hershey School in perpetuity.

Related MiniCase Instructors may want to consider assigning and discussing the following MiniCase, which covers topics found in this chapter. Every MiniCase has assignable McGrawHill Connect® case questions available.

MiniCase 9: LVMH Acquires Tiffany: The American Jeweler Learns How to Speak French

CHAPTER 10 Global Strategy: Competing Around the World Teacher Resource Chapter Contents Teacher’s Resource Manual (TRM): Implementation Guide

ii

Learning Objectives

1

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Strategic Management, 6e Teacher‘s Resource Manual Textbook Chapter Contents

2

Chapter Teaching Resources

3

Overview of Chapter

5

Classroom Outline

7

Strategy Highlights

18

myStrategy

19

Discussion Questions

20

TRM Extra: Social/Ethical Questions

21

TRM Extra: Small Group Activities

22

Related MiniCase

24

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Strategic Management, 6e Teacher‘s Resource Manual

Teacher’s Resource Manual: Implementation Guide This Teacher‘s Resource Manual (TRM), supports delivery of your chosen curriculum and pedagogy.

This manual contains more than just guidance on how to cover concepts discussed in the sixth edition of Strategic Management; it also provides tips and best practices for how to utilize the full product suite (from the textbook to SmartBook® to Connect®). In addition, this manual includes a variety of supplemental teaching resources to enhance your ability to create an engaging learning experience for your students. Regardless of whether you teach in face-to-face traditional classrooms, blended (flipped) classrooms, online environments, or hybrid formats, you‘ll find everything you need in this improved resource.

The TRM follows the order of the textbook outline for each chapter and is divided into sections for each learning objective. Each section identifies the relevant PowerPoint slides from both the Lecture slides and the Supplemental Lecture slides (more on this below). This eases your preparation time for class as you can adjust slides as needed to ensure your students stay actively engaged throughout each session.

WHAT INSTRUCTOR RESOURCES ARE AVAILABLE? Within each section of the TRM you will find an assortment of examples, exercises, Connect® assignments, updates on the latest research, Strategy Smart Video discussions, and discussion questions and exercises from which you can choose to enhance your students‘ learning and engagement.

Within the Connect® Library, you will find the following: In the Test Builder tab, you can create tests from the Test Bank that can be printed or administered within your LMS. In the Instructor Resources, you can access all of the following items:         

Teacher‘s Resource Manual PowerPoints (Accessible) Application-Based Activities‘ accompanying Teaching Notes Create™ Case Support MiniCase Support Sample Syllabi Video Library Capsim‘s Capstone Simulation and Capsim IM Image Bank (for your customized PowerPoints)

64) This Teacher‘s Resource Manual is posted by chapter.

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Strategic Management, 6e Teacher‘s Resource Manual 65) Two sets of ADA-accessible PowerPoints are available with each chapter: a. Lecture slides cover chapter concepts and exhibits. b. Supplemental Lecture slides cover: i. ii. iii. iv.

Chapter Cases Strategy Highlights Implications for Strategic Leaders Strategy Smart Video selections (not part of the book, but an additional resource found here) v. Key Terms

66) Test Bank questions, found in the Library tab entitled Test Builder, are posted by chapter. You will find a variety of question types within the test bank such as Matching, Ranking, Multiple Choice, Select-All-That-Apply, True/False, Short Answer, and Essays to test student mastery across Bloom‘s Taxonomy (i.e. Understand, Apply, and Analyze).

67) Create™ Case Support (all cases are available in Create™ and selected ones in HBP) a. A case matrix that identifies the industry sector covered by each case, as well as the primary and secondary chapter alignments b. One-page case abstract for quick overview of each case c. Case Teaching Notes for instructor use only d. Case Financials in Excel files for the exhibit data in the most popular cases e. Case Strategic Financial Analysis template f. Instructions on How to Download SEC Financial Data into Excel Spreadsheets 68) MiniCase Support (all MiniCases are located in Part Four of the book) a. MiniCase Teaching Notes comprising suggested answers to the MiniCase discussion questions. In some instances, they also provide specific additional article and video resources to accompany each MiniCase.

69) Video Resources, located in the Video Library, provide links to supplemental video resources to accompany both the MiniCases and full-length Create™ cases, as well as links to all of the assignable videos in Connect®.

70) A link to Capsim’s Capstone Simulation and a Capsim Instructor’s Manual correlated to Strategic Management is provided; this simulation allows students to apply their knowledge of key strategy concepts.

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Strategic Management, 6e Teacher‘s Resource Manual

HOW CAN SMARTBOOK® ENHANCE MY STUDENTS’ PERFORMANCE? SmartBook® is assignable through Connect®, McGraw Hill‘s online assignment and assessment system.

One of the first fully adaptive and individualized study tools designed for students, it creates a personalized learning experience, giving students the opportunity to practice and challenge their understanding of core strategy concepts. The reporting tools within SmartBook® show where students are struggling to understand specific concepts.

Typically, SmartBook® is assigned by module (chapter), and instructors can set which learning objectives to cover as well as the number of probes the student will see for each assignment. Instructors also set the number of points a SmartBook® module is worth in the course. Usually, applying a minimal number of points for completion of each module is enough to encourage students to read the chapter.

Many instructors assign these modules to be completed before the class or online session.

SmartBook® provides several diagnostic tools for instructors to gauge which concepts their students struggle to understand. Below is the set of adaptive assignment reports available in SmartBook®:      

Progress Overview: View student progress broken down by module.

Student Details: View student progress details plus completion level breakdown for each module.

Module Details: View information on how your class performed on each section of their assigned modules.

Practice Quiz: This gives you a quick overview of your students‘ quizzes results.

Missed Questions Metacognitive Skills

By selecting ―Module Details‖ the instructor finds the results for the students in the class overall. These details reveal where in the chapters students might be struggling. The module gives the chapter section, average time spent, average questions per student correct/total, and the percentage of correctness (number of assigned items). Information about the most challenging sections for students can help instructors refine the focus of the next classroom or online session.

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Strategic Management, 6e Teacher‘s Resource Manual For more detailed analysis, SmartBook® captures students‘ confidence in their competency using the ―Metacognitive Skills‖ report. Below (a recreation of the Metacognitive Skills report), we find the second student is confident and mostly correct (91% in the correct & aware column) while the first student ―doesn‘t know what they don‘t know‖ (39% in the far-right column).

STUDENT

Student 1 Student 2 Student 3 Student 4 Student 5 Student 6 Student 7 Student 8 Student 9 Student 10

CORRECT and AWARE 61% 91% 81% 83% 76% 66% 77% 91% 93% 70%

CORRECT and UNAWARE 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

INCORRECT INCORRECT and AWARE and UNAWARE 0% 39% 3% 5% 0% 19% 0% 17% 3% 21% 9% 25% 3% 20% 2% 7% 2% 5% 6% 25%

APPLICATION EXERCISES, QUIZZES, AND TEST BANK What resources are available at the book level?

Connect® offers a wealth of content for both students and instructors. Application Exercises require students to apply key concepts to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor. Before getting into chapter-level assignments, let‘s look at the book-level assignments available.

Four exercises are available for instructors to assign beyond the chapter materials. These are 1) MiniCase Case Analyses, 2) Case Exercises, 3) Financial Ratio Reviews, and 4) MyStrategy exercises.

The Financial Ratio Reviews and MyStrategy exercises comprise our new Student Primer in Connect.

37) To encourage analytical thinking, each MiniCase from Part Four of the book is also an assignable application exercise (MiniCase Case Analysis). Each MiniCase is followed by four to five multiple-choice questions that assess students‘ understanding of the key issues presented in the MiniCase.

38) Case Exercises focus on the key symptoms and influences of a problem a firm might be facing, followed by a series of questions that help students understand how the firm eventually achieves a solution to that problem (or asks students to suggest a solution).

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Strategic Management, 6e Teacher‘s Resource Manual 39) Financial Ratio Reviews give students the opportunity to further hone their financial analysis skills; review exercises cover each type of financial ratio (activity, leverage, liquidity, market and profitability).

40) MyStrategy exercises for each chapter provide direct personal applications of strategy concepts to careers and lives to help students internalize the content.

What resources are available for each chapter and how should I integrate them in my course?

Consider assigning one or two Application Exercises per chapter. They are built around chapter learning objectives, so the instructor can choose based on their focus for each specific chapter. Several types of application exercises are available in each chapter. The newest additions are our Animated Videos, comprising three- to four-minute videos on key concepts or concepts that tend to challenge students the most. Each animation is accompanied by three to four multiple-choice questions to check student attention and comprehension. Comprehensive Case Analyses and our new On-Location Video Cases feature firms and industries different than those discussed in the textbook and provide relevant, topical information for students. Finally, Click-and-Drag exercises help students actively demonstrate their understanding of the associated learning objectives. Application Exercises can be assigned as preparatory exercises due before class (this is especially good for flipped classrooms), or after class as concept comprehension checks. Applications Exercises will generally be assigned as homework or practice as part of the overall class grade. A general rule of thumb would be to make application exercises worth 5 to 10 points each since these require time and thought.

To find the Applications in Connect®, go to ―Add Assignment‖ and then select ―Question Bank.‖ Application Exercises are organized by chapter. Instructors have the option to select for one attempt only, but they may want to give students unlimited or multiple attempts on the first few assignments to give students a chance to learn and navigate the system. (As the course progresses, instructors may want to tighten up the time on task and reduce the number of attempts to complete each exercise).

Chapter quizzes and full chapter test banks are available for assignment, and like the Application Exercises, are organized by chapter. The value applied to each question should be relatively low because numerous questions are usually assigned for each chapter. As such, make these questions worth 1 or 2 points each. The feedback given to students is time-flexible. Selecting feedback to be displayed after the assignment due date helps to keep students from giving the correct answers to other students while the questions are still available. For this reason, it is suggested that no feedback to quizzes and test bank exams be made available until after the assignment is due.

When should I assign these digital components?

To fully utilize the power of the digital components, instructors will often assign the SmartBook® reading and adaptive learning probes before class meets. Application Exercises can be completed either before or after class; if they are completed before class, they can sometimes serve as good springboards for class discussions. The chapter quiz makes a good check on comprehension of the material and may work best if assigned after each class period. The test bank serves as a good resource for building midterm or final exams.

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Strategic Management, 6e Teacher‘s Resource Manual More detailed information on SmartBook® and Connect® is available through several resources at McGraw Hill. A good starting point is your local Learning Technology Representative, who can be found here: http://www.mheducation.com/highered/platforms/connect/features-educators.html

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Strategic Management, 6e Teacher‘s Resource Manual

COURSE PREPARATION Helpful Suggestions Regarding Assignment Policies: Connect® gives instructors a wide array of flexibility in making assignments and creating grading policies. Instructors may choose to: 

assign as many assignments as appropriate given the level and time commitment expected for the class,



determine point values for each question/application that works within the total course percentages,



make available multiple attempts per assignment with options of accepting the highest score or averaging all the attempts together (several attempts are particularly good for homework assignments),



deduct points for late assignment submissions (percentage deduction per hour/day/week/etc.) or create hard deadlines thus accepting no late submissions,



show feedback on application/questions immediately upon submission or at the time the assignment is due for the whole class, create new assignments or questions from scratch, or edited versions from a variety of provided resources.

Throughout the TRM for each chapter, we will integrate materials from the Lecture PowerPoint slides, Supplemental Lecture slides, Connect® Application Exercises, and MiniCases. This integration of resources will allow for a cohesive presentation of the relevant resources at your disposal, helping you to convey these topics effectively and efficiently to your students.

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Strategic Management, 6e Teacher‘s Resource Manual

CHAPTER 10 Learning Objectives 10-1

Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy.

10-2

Explain why companies expand internationally, and evaluate the advantages and disadvantages of competing globally.

10-3

Apply the CAGE distance framework to guide MNE decisions on which countries to enter.

10-4

Compare and contrast the different options MNEs have for entering foreign markets.

10-5

Apply the cost-responsiveness framework to evaluate the four different strategies MNEs can pursue when competing globally.

10-6

Apply Porter‘s diamond framework to explain why certain industries are more competitive in specific nations than in others.

This chapter discusses the importance of globalization. It illustrates why firms are eager to enter the global marketplace. To do so, however, firms need to be aware of the turbulent and diverse nature of the global marketplace. This dynamic situation is caused by different geographic characteristics, cultural factors, and different types of demand. To successfully compete worldwide, firms need to develop global strategies. We begin with the definitions of globalization, multinational enterprise, and foreign direct investment in the beginning to help students develop a good foundation with globalization concepts. Then we talk about why, where, and how MNEs have entered the global marketplace. We discuss several types of global strategies arrayed within the integration-responsiveness framework and their pros and cons. Finally, we discuss the world leadership in specific industries as analyzed through Porter‘s Diamond of National Competitive Advantage.

A chapter opening case on Ikea and two strategy highlights are included in the chapter for tangible applications of the theoretical frameworks discussed.

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Strategic Management, 6e Teacher‘s Resource Manual

Text Chapter Contents ChapterCase 10: IKEA: The World‘s Most Profitable Retailer 10.1 What Is Globalization? (LO 10-1) CONNECT® INTEGRATION Multiple Choice: Globalization 10.2 Competing Globally: Why? (LO 10-2) Strategy Highlight 10.1: Walmart Retreats from Germany, and German Ultra-Low-Cost Grocers Invade the United States CONNECT® INTEGRATION Case Analysis: Kentucky Fried Chicken Goes Global 10.3 Competing Globally: Where and How? (LO 10-3, LO 10-4) CONNECT® INTEGRATION Case Analysis: Carhartt—The Original Workwear Brand 10.4 Cost Reduction vs. Local Responsiveness (LO 10-5) Strategy Highlight 10.2: Squid Game: Netflix’s Transnational Strategy CONNECT® INTEGRATION Click & Drag: Cost-Responsiveness Framework CONNECT® INTEGRATION Whiteboard Video: The Integration Responsiveness Framework 10.5 National Competitive Advantage: World Leadership in Specific Industries (LO 10-6) CONNECT® INTEGRATION Matching/Multiple Choice: Porter’s Diamond Framework of National Advantage 10.6 Implications for Strategic Leaders ChapterCase 10 / Part II CONNECT® INTEGRATION Comprehension Case: IKEA: The World’s Most Profitable Retailer

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Strategic Management, 6e Teacher‘s Resource Manual

Chapter Teaching Resources SECTION

Title

RESOURCE TYPE

CHAPTERCASE 10

IKEA: The World‘s Most Profitable Retailer Ikea's secret to global success Fortune

Web Video (2 mins)

Globalization explained

Web Video (4 mins)

Ethical/Social Issues: Globalization 4.0

TRM Extra

Small Group Exercise: Define a U.S. Firm

TRM Extra

Globalization

Connect® Multiple Choice Exercise

―U.S. Tech Giants Bet Big on India.

Now It‘s Changing the Rules.‖

WSJ article

Tesla Faces Fresh Challenges After Hitting 2019 Delivery Goal

WSJ article

10.1: What Is Globalization?

10.2: Going Global: Why?

Kentucky Fried Chicken Goes Global

Connect® Case Analysis

Ethical/Social Issues: Developing Nations

TRM Extra

MiniCase 10: Hollywood Goes Global

Rothaermel Textbook

Carhartt—The Original Workwear Brand

Connect® Case Analysis

Where will future global growth come from?

McKinsey Article

Small Group Exercise: Clif Bar Global Approach

TRM Extra

10.3: Going Global: Where and How?

10.4: Cost Reduction vs. Local

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Strategic Management, 6e Teacher‘s Resource Manual Responsiveness: The IntegrationResponsiveness Framework What Trade War? China‘s First Costco Draws Crowds of Shoppers

WSJ article

Cost-Responsiveness Framework

Connect® Click & Drag Exercise

The Integration Responsiveness Framework

Connect® Whiteboard Video

Greek Shipping Tycoons Expand EU, World Dominance

Online article

Porter‘s Diamond Framework of National Advantage

Connect® Matching/Multiple Choice Exercise

IKEA: The World‘s Most Profitable Retailer

Connect® Comprehension Case

10.5: National Competitive Advantage: World Leadership in Specific Industries

10.6: Implications for Strategic Leaders

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Strategic Management, 6e Teacher‘s Resource Manual

Overview of the Chapter 10.1

What Is Globalization?

Globalization is a process of closer integration and exchange among different peoples and countries worldwide. A key engine behind globalization is the multination enterprise (MNE)—a company that deploys resources and capabilities in at least two companies to compete in the same product of market. MNEs need an effective global strategy. While MNEs comprise less than 1% of U.S. companies they employ 19% of the workforce and make up 74% of privatesector R&D spending. Globalization has gone through three distinct stages—of which the 21st century represents Globalization 3.0 and is illustrated in Exhibit 10.4. A current question is whether Globalization 3.1 will be a period of retrenchment.

10.2

Competing Globally: Why? When investigating the “why” of globalization, Exhibit 10.5 looks at the advantages and disadvantages of international expansion. The questions of international expansion can be thought of as specialized cases of the strategies of growth examined in Chapters 5-8. Strategy Highlight 10.1 looks at the reasons that Walmart chose to retreat from Germany and examines the success of German entrants Aldi and Lidl in international markets. Walmart is paying close attention to its new German-based competition as it continues to sharpen its low-cost strategic focus.

10.3

Competing Globally: Where and How? In deciding where and how to compete globally, the CAGE (Cultural, Administrative, Geographic and Economic) Distance Framework seeks to normalize these multidimensional attributes to describe a composite difference (distance) that can be useful in identifying and ranking alternatives of international expansion. Exhibit 10.6 details key attributes of this framework. Once the ―where‖ of international expansion is determined, Exhibit 10.7 shows the modes of foreign-market entry along the Investment and Control Continuum.

10.4

Cost Reduction vs. Local Responsiveness: The Integration-Responsiveness Framework In an early chapter, we saw the quadrant impacts of cost leadership vs differentiation. In examining MNEs, the axes of interest are Pressure for Cost Reduction vs Pressure for Local Responsiveness. Exhibit 10.8 identifies the resulting quadrants including some representative companies. These quadrants relate to a generic international strategy. Exhibit 10.9 details the characteristics, benefits, and risks of each of these strategies. Strategy Highlight 10.2 focuses on Netflix‘s transnational strategy. South Korea has become a cultural center in film (Parasite), Kbeauty (Soko Glam), and music (BTS). Netflix‘s success (and the success of Korean pop culture) is extraordinary given South Korea‘s large cultural distance between other countries. This Strategy Highlight examines how Netflix successfully implemented their transnational strategy.

Finally, Exhibit 10.10 shows an example of dynamic strategic positioning using Google‘s YouTube.

5

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Strategic Management, 6e Teacher‘s Resource Manual 10.5

National Competitive Advantage: World Leadership in Specific Industries The issue of National Competitive Advantage is directly tied to the question: why are certain industries more competitive in some countries? Michael Porter attempted to explore this using:    

Factor conditions Demand conditions Competitive intensity in focal industry Related and supporting industries

Porter related these factors in his Diamond Framework shown in Exhibit 10.11.

10.6

Implications for Strategic Leaders The question of expansion beyond a given home market must be combined choices of the degree of vertical integration and diversification to define the triad of dimensions that must be considered in the formulation of a firm‘s corporate strategy. The CAGE framework provides a valuable tool for leaders to use in this formulation process.

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Strategic Management, 6e Teacher‘s Resource Manual

Classroom Outline ChapterCase 10 IKEA: The World’s Most Profitable Retailer The opening ChapterCase discusses the unique globalization story of IKEA. Founded in 1943 in Sweden, it took more than 20 years before it expanded beyond its neighbor, Norway. As of 2021, it is anchored by more than 450 stores across 60 countries with $50 billion in revenue. What aspect of Ikea‘s core strategy has it successfully replicated across multiple countries?

INSTRUCTOR SUPPLEMENT SLIDE 3 STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 13 This two-minute video is by Fortune magazine and discusses some of IKEA‘s global successes.

ChapterCase 10 Part II While IKEA‘s ―assemble at home‖ strategy for furnishings, delivered a sustained international competitive advantage, the dynamics of time and new competition have created significant challenges for future growth. Some of these are ―social/ethical‖ issues regarding deforestation and global warming.

The ongoing conflict between Russia and Ukraine also has created unique challenges. IKEA closed its stores in Russia to protest the invasion—a risky move given that Russia is a crucial wood supplier. Other issues involve new competitive channels such as online growth as opposed to the IKEA ―Big Box‖ format. IKEA will need to address the internal and external issues to achieve a goal of doubling the number of its yearly store openings.

ChapterCase 10 Discussion Questions 6.

List IKEA‘s external and internal challenges. Looking at IKEA‘s challenges, which ones do you think pose the most significant threats? Why? How would you address the challenges?

Students may list several challenges. Internally, IKEA has supply chain concerns such as bottlenecks constraining growth. Coupled with the large amount of wood in used in most of its designs, IKEA faces both environmental concerns connected to deforestation and climate change. It also faces constraints given Russia‘s role as a primary supplier of wood and the current conflict in Ukraine. It has a complicated organizational structure which is effective at tax minimization, but also can limit access to capital. Externally, the firm must deal with the looming threat of online retailing. IKEA has done well 7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual with in-store retailing thus far by making each store an experience for shoppers. However, its key demographic customer of young and upwardly moving shoppers are moving to online in much higher percentages than other groups. Students may suggest that IKEA buy a smaller firm to help it move into online retailing faster.

7.

Did it surprise you to learn that both a rich developed country (e.g., the United States and Australia) as well as emerging economies (e.g., China and India) are the fastest-growing international markets for IKEA? Does this fact pose any challenges to how IKEA ought to compete across the globe? Why or why not?

A key consideration in this question is the extent to which the products that IKEA sells have highly localized consumer preferences. Food competition tends to be very subject to local tastes; whereas furniture may be somewhat less so. The fact that IKEA has a cost leadership strategy benchmarked against global rivals positions it to compete equally well for the aspiring middle-class consumers in emerging markets and the thrift-conscious consumers (like our college students) in developed markets.

IKEA does a massive amount of research that aids in their design process, helping them create furniture that reflects their customers‘ needs and wants. Additionally, while IKEA sells furniture that appeals universally, their presentation of the furniture in their displays changes from country to country. The Fortune video provided previously describes how IKEA crafts displays in stores that appeal to the local market. For example, they create rooms with tatami mats in Japan while displays in the Netherlands feature sloping ceilings and walls.

8.

What can IKEA do to continue to drive growth globally, especially given its strategic intent to double annual store openings?

IKEA‘s biggest challenge is likely to be obtaining the capital needed to fund these ambitious growth targets. Its complex corporate structure and its determination to remain family controlled and private create barriers for both equity and debt sources of funding. That said, it has a good track record of growth. Difficult government environments for multinationals in China, India, and to some degree in the United States may be the biggest concern that the firm is able to gain access to markets in these low saturation countries (compared to Europe).

9.

Assume IKEA has hired you to consult on creating shared value (refer to the discussion in Chapter 5). Which areas would you recommend the company be most sensitive to, and how should these be addressed?

The IKEA Foundation is the philanthropic part of the ownership group for IKEA. Perhaps the most direct impact is on wood. Consumers know IKEA products are largely made from wood and IKEA is committed to using almost exclusively certified forest wood that has been harvested in a sustainable and renewable manner. In 2019 the firm declared its desire to be ‗climate positive‘ by 2030 with a variety of policies and programs dedicated towards this goal. Students may have other ideas that include addressing homelessness and poverty or other philanthropic initiatives.

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10.1 WHAT IS GLOBALIZATION? LO 10-1 Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy.

LECTURE SLIDES 3–6 STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 14 This four-minute video gives a high-level overview of globalization versus an all-domestic competitive environment.

DISCUSSION TOPICS There are three stages of globalization from a historical perspective. Globalization 1.0 occurred between 1900 and 1941, and the cross-border trading was very export-oriented; only sales and distribution took place overseas. Globalization 2.0 happened from 1945 to 2000. FDI became the primary means for globalization with the duplication of home market business operations in world markets. Globalization 3.0 happened after 2000. The major change is that MNEs shifted from FDI to global collaborative networks. The text raises a great question for class discussion which is: ―Are we entering a global retrenchment period?‖ There are certainly signs in Europe, the United States, and several other regions of a pullback in global interest. With China developing into a strategic rival coupled with increased hostilities with Russia, the creation of two global trading blocs may lead to lower economic growth and other consequences.

A July 2018 article by Dr. Thieß Petersen, The Global Economic Balance of Power is Shifting, reports that the percent of global production by ―developed‖ economies (US, Canada, EU and Japan) has fallen from approximately 75% in 2000 to less than 55% in 2017. He further projects erosion to 41.3% for G7 countries by 2023.

While many multinational companies like Coca-Cola, Procter & Gamble, and Sony tend to focus on more affluent customers, some 4 billion people on the planet live on less than $2,000 a year (or $5.50 a day). Recently, scholars have shown that this so-called bottom of the pyramid of the global economy— the largest but poorest socioeconomic group of the world‘s population—can yield significant business opportunities, which—if satisfied—could improve the living standard of the world‘s poorest.

Muhammad Yunus, winner of the Nobel Peace Prize, founded Grameen Bank in Bangladesh to provide small loans (so-called microcredit) to impoverished villagers. Loans provided funding for their entrepreneurial ventures so that villagers could help themselves climb out of poverty. As a follow-up business, Grameen Telecom now offers a microloan combined with a cell phone for local entrepreneurs.

Other businesses have also found profitable business opportunities at the bottom of the pyramid. In India, Arvind Mills offers jeans in a ready-to-make kit that costs only a fraction of the high-end Levi‘s.

Instructors can ask students where their sneakers are being made. The answer will be most probably in Asia. Then ask students why the sneakers are made in Asia. We have found personalizing the globalization of our consumer goods to be a good opening for this material.

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Strategic Management, 6e Teacher‘s Resource Manual The chapter notes that some firms are started in countries with relatively small populations (and thus small domestic markets), such as Taiwan, Australia, and Finland. In these cases, the firms often rapidly expand internationally to reach a large enough market for economies of scale. Some large countries (such as Brazil, China, and Japan) have economic incentives (and sometimes mandates) for firms to export their products. There are cases where such mandates result in products available internationally but not to the local population (except perhaps through a ―black-market‖ or unofficial distribution channel). Is this closed domestic market an ethical issue for the firm? Is it an ethical issue for the government? Why or why not? Students may view this question from a microeconomic perspective where government policy plays a central role in directing firms‘ import/export strategies. When answering this question from consumers‘ perspectives in domestic markets, it might be unethical to both firms and governments; when answering the question from governments‘ perspectives, it may not be unethical because sometimes this is a necessary means to achieve rapid economic growth. This is especially true in emerging economies.

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for information on an extended discussion about the ethics long-term versus short term perspectives in a global environment.

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity around the appropriate definition of a ―U.S. Firm‖ or a ―Swedish Firm‖ in the case of IKEA.

INTEGRATION Multiple Choice: Globalization This exercise will help students to understand the structure of an Multinational Enterprise (MNE), the meaning of foreign direct investments and how companies use a global strategy to gain and sustain a competitive advantage. 

Difficulty: Medium  Blooms: Analyze

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10.2 COMPETING GLOBALLY: WHY? LO 10-2 Explain why companies expand internationally, and evaluate the advantages and disadvantages of going global.

LECTURE SLIDES 7–16 EXAMPLES One of the challenges in international expansion comes if the target economy ―changes the rules in the middle of the game.‖ In 2018, Walmart spent $16 Billion to acquire India‘s largest e-commerce start-up.

Since then, India has been erecting roadblocks through special requirements for U.S. (see ―U.S. Tech Giants Bet Big on India. Now It‘s Changing the Rules.‖, WSJ). What alternatives can Walmart pursue to salvage its investment?

Contrast this with a 2020 article on reasons for and challenges of Tesla‘s expansion in China (see ―Tesla Faces Fresh Challenges After Hitting 2019 Delivery Goal‖, WSJ). What issues will Tesla have to overcome for this expansion to be successful?

Strategy Highlight 10.1 Walmart Retreats from German, and German Ultra-Low-Cost Grocers Invade the United States Click here for a summary of the Strategy Highlight covering Walmart and the move of European grocers into the U.S. market.

INSTRUCTOR SUPPLEMENT SLIDE 5 CLASS DISCUSSION A possible starting point for class discussion would be to highlight and analyze the mistakes that Walmart made when they entered Germany. What did management do that jeopardized their success?

Students should identify cultural issues as a possible primary reason for their lack of success. The inability of Walmart to exploit the same cost savings in Germany was another primary factor. Ask students if they think Walmart could have salvaged their position in Germany. Why or why not? Second, new entrants into the U.S. market threaten Walmart‘s current market position. This point provides an opportunity to review how new entrants hurt the profitability of an industry (CH 3). What can and should Walmart do to compete with ultra-low-cost grocery stores? Finally, how do current external conditions (COVID-19, inflation, etc.) impact Walmart and their success? By all accounts, Walmart is weathering the storm, but it‘s not without consequences: Walmart to Cut Hundreds of Corporate Jobs.

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INTEGRATION Case Analysis: Kentucky Fried Chicken Goes Global This case analysis explores the application of global approaches to actual enterprises. The goal of this case analysis is to recognize important global issues for Multinational Enterprises (MNEs). 

Difficulty: Medium  Blooms: Analyze

INSTRUCTOR SUPPLEMENT SLIDE 5: WALMART RETREATS FROM GERMANY, AND LIDL INVADES THE UNITED STATES

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for some thoughts on the role of large corporations on raising the standard of living in developing nations.

CLASS DISCUSSION While students are quite familiar with many Hollywood movies, in most cases they are NOT aware of how large the international revenue impact is on this business. They also have not usually given much thought to such revenues having a direct effect on which scripts are ―green-lighted‖ for production and how key actors are often now chosen based on international appeal rather than what will sell best in the United States. This topic is covered well in MiniCase 10: Hollywood Goes Global. Many U.S. students will be enlightened by the reading and case discussion. There is also a CONNECT® exercise available that instructors can assign for each MiniCase in the text.

10.3 COMPETING GLOBALLY: WHERE AND HOW? LECTURE SLIDES 17–22 LO 10-3 Apply the CAGE distance framework to guide MNE decisions on which countries to enter.

EXAMPLES Because of its attractive institutional framework and low cultural distance, Ireland received roughly onequarter of all U.S. FDI into the EU. The chipmaker Intel invested some $5 billion just west of Dublin to build the largest and most advanced chipmaking facility in the world. HP is one of the biggest employers 12 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual in the western part of Ireland. Apple located its European software development and support center in Ireland.

When Walmart entered its rival Tesco‘s home market, it entered by acquiring the third largest mass market retailer in the UK, ASDA. It has since thrived in that market. When Tesco decided to enter the United States, they did so through greenfield building with the Fresh & Easy Concept. This was an expensive failure (Why Tesco Failed in the United States, a 10-min video). You can use this example to discuss the advantages and disadvantages of each method of entering a new market. Contrast the experience of these two firms, and Walmart‘s experience in the UK with their experience in Germany (Strategy Highlight 10.1) to illustrate the importance of choosing the optimal entry method.

The global merger of AB InBev and SABMiller is driven by market structures in China and Africa for beer. Russ Coff‘s Carpenter Strategy site has an excellent summary of the case and an example of a decision tree for the strategy that reflects uncertainties in global transactions.

LO 10-4 Compare and contrast the different options MNEs have for entering foreign markets.

CLASS DISCUSSION McKinsey‘s forecast in 2018 on global growth provides some interesting thoughts that should impact corporate strategies for MNEs. (see, ―Where will future global growth come from?‖ McKinsey). Ask students to read this article and discuss BRIC and urbanization and how these and other trends may have global business impacts. Then ask them to choose an industry and identify two countries that would be targeted for future expansion based on the forecast. (For a more macroeconomic view of forecasting, ask the students to read Shifting Tides: Global Economic Scenarios for 2015-25.)

To communicate how important cultural differences can become when a firm goes global, we can combine the cultural differences with Porter‘s value chain. For instance, McDonald‘s menu in the United States is different from the one in India. Why? Will the staffing policy be different when comparing the U.S. style with the Japanese style? Will different cultural holidays affect a MNE‘s global operations? How about religions? These questions can be tied into Hofstede‘s cultural dimensions. You can use this discussion to set up a team exercise. Group students into countries they are familiar with (easy for international students, for U.S. students, choose countries that they may have traveled to). Ask them to use McDonald‘s value chain and think through what changes might need to be made for their country. You can also use this link to demonstrate different McDonald‘s offerings in different countries: 25 Unusual and Wonderful McDonald's International Menu Favorites.

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE

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Strategic Management, 6e Teacher‘s Resource Manual Click here for a suggested small group activity for some team discussion on how Clif Bar might approach a global strategy.

INTEGRATION Case Analysis: Carhartt—The Original Workwear Brand This case analysis recognizes the various globalization approaches used by Carhartt. It is important because approaches to globalization are varied and chosen for different reasons by different companies. 

Difficulty: Medium  Blooms: Apply

10.4 COST REDUCTIONS VS. LOCAL RESPONSIVENESS LECTURE SLIDES 23–29 LO 10-5 Apply the cost-responsiveness framework to evaluate the four different strategies MNEs can pursue when competing globally.

The integration-responsiveness framework in Exhibit 10.8 has examples in each quadrant. These companies have different strategic intent in terms of the economy of scale and scope. For instance, if the strategic intent is to maximize economies of scale, then MNEs tend to offer more standardized products, and thus MNEs are located in the quadrant with lower local responsiveness. If the MNEs intend to satisfy diverse local demands by offering differentiated products, then this will be positioned at a higher cost and higher responsiveness quadrant. This framework can be used to review Porter‘s generic strategies. Remind the students about differentiation, cost leadership, focused differentiation, and focused cost leadership (see Chapter 6 for a review).

Strategy Highlight 10.2 Squid Game: Netflix’s Transnational Strategy Click here for a summary of the Strategy Highlight examining Netflix‘s successful series Squid Game and Netflix‘s transnational strategy.

CLASS DISCUSSION South Korea has significant cultural distance from the rest of the world, yet many of their media offerings have managed to bridge this gap. This is remarkable given that the CAGE framework indicates that offerings with high linguistic content such as TV shows, music, and films may be difficult to bridge the cultural gap. Ask students to weigh in on why they think South Korean media has been able to 14 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual overcome this distance. This article may be helpful: ―How Korean Pop Culture Took the World by Storm.‖ Students may remember Psy‘s Gangnam Style music video that took the world by storm and which exposed many non-Korean audiences to their first K-pop song. Word-of-mouth on social media, active market campaigns, and devoted fan bases are also responsible for hallyu. Ask students if they think of any other cultures that could be as influential.

EXAMPLES Like the YouTube example in Exhibit 10.10, automakers are shifting their global strategies. In this case, they are becoming more standardized across markets. Ask students to research their car before class to find out whether that model is sold only in the U.S. or whether it is more of a ―world car.‖ Will the movement towards the world car be accelerated by alliances such as Renault-Nissan? What would have happened if the 2019 proposed merger with Fiat Chrysler had gone through? (See Renault-Nissan should have merged with Fiat Chrysler: Ghosn, Reuters).

Grocery store chains based in developed markets have typically found challenges in adapting their format to emerging market consumers. (See ―Modern Grocery and the Emerging-Market Consumer: A Complicated Courtship‖ McKinsey Quarterly). This report is a good analysis of why hypermarkets and similar formats have made limited competitive progress versus traditional formats in these markets and is a great example of liability of foreignness. Given this backdrop, both Walmart and Costco have announced major expansion into the Chinese market ( See, ―What Trade War? China‘s First Costco Draws Crowds of Shoppers‖, WSJ; and Foreign Retailers expanding in Chinese grocery market, Global Times). What strategies are they likely to employ to optimize success?

STRATEGY SMART VIDEO INSTRUCTOR SUPPLEMENT SLIDE 15 This three-minute video provides a rundown of the 100 most valuable global brands of 2019.

This funny set of HSBC commercials on cultural differences could be used to illustrate why localization strategies might be beneficial (HSBC Funny Culture Ads).

INTEGRATION Click & Drag: Cost-Responsiveness Framework This exercise will show students how to identify the best strategic positioning for a company to gain and sustain a competitive advantage when competing globally. 

Difficulty: Medium  Blooms: Apply

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Strategic Management, 6e Teacher‘s Resource Manual

INTEGRATION Whiteboard Video: The Integration Responsiveness Framework When moving internationally, firms must balance the pressure for cost reductions with the pressures for local responsiveness. These two pressures help determine the type of international strategy that a firm should pursue. 

Difficulty: Medium  Blooms: Apply

10.5 NATIONAL COMPETITIVE ADVANTAGE: WORLD LEADERSHIP IN SPECIFIC INDUSTRIES LECTURE SLIDES 30–35 LO 10-6 Apply Porter‘s diamond framework to explain why certain industries are more competitive in specific nations than in others.

EXAMPLE Corporate strategies have a strong association with international strategies. Even if an organization does not plan to import or export directly, management must look at an international business environment in which actions of competitors, buyers, sellers, and the new entrants of providers of substitutes may influence the domestic market. Information technology is reinforcing this trend. Porter introduced the diamond model that allows analyzing at the national level. Some countries are more competitive than others, and some industries within nations are more competitive than others. Porter‘s diamond framework suggests that the national home base of an organization plays an important role in shaping the extent to which it is likely to achieve advantage on a global scale.

Greek shipping companies have grown to a 53% share of vessels in the EU and 21% worldwide despite a population of only 10 million people. Ask students to diagnose the reasons for this using Porter‘s diamond framework (See ―Greek Shipping Tycoons Expand EU, World Dominance‖ National Herald)

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INTEGRATION Matching/Multiple Choice: Porter‘s Diamond Framework of National Advantage This activity builds student understanding of the elements of national competitive advantage. Students will match the correct factor to an example in the click-and-drag exercise. Then the student will answer three questions to conclude the activity. Students should already be familiar with Porter‘s diamond framework from the text before starting this activity.

Follow-Up Activity: The instructor can expand on the concepts from this activity by bringing out some of the international experiences of students in the class. Students that have grown up in other countries or even had study abroad or other travel experiences can often see a difference in these factors from that found in the home location of your university. 

Difficulty: Medium  Blooms: Evaluate

10.6 IMPLICATIONS FOR STRATEGIC LEADERS INSTRUCTOR SUPPLEMENT SLIDE 8 DISCUSSION TOPICS Consider the city/region in which your university is located. Given the discussions in the chapter about where to expand globally, what characteristics are unusual about your location that would attract foreign direct investment? Do you have nearby industrial regional clusters? Access to abundant (or cheap) raw materials of some sort? Is university research strong in fields important to some industries? Students could be asked to research this before class by investigating the economic development website of their local government. For example, in Georgia Tech‘s home state, the Georgia Office of Economic Development has a page for international trade; it also has pages describing the resources that the state offers new businesses, and information about the existing key industries in the state. Many research universities have technology incubator organizations that promote the use of university research discoveries to start or grow businesses. At Arizona State University, for example, Arizona Technology Enterprises is targeted not only with monetizing the value of ASU‘s patent portfolio, but also of attracting new businesses into the state.

Location remains central to competition. Today‘s economic map of the world is characterized by what Porter calls clusters: critical masses in one place of linked industries and institutions, from suppliers to universities to government agencies, which enjoy unusual competitive success in a particular field. If globalization and drastic advancements in technology indeed reduce the importance of firm location, what accounts for the thriving clusters of computer technology firms in Silicon Valley, medical device firms in the Chicago area, and biotechnology firms in Boston? Known for their engineering prowess, car companies such as Daimler, BMW, Audi, and Porsche are clustered in southern Germany. High17 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual performance Formula One racecars are designed and crafted in England‘s Motor Sport Valley, near London. Many fashion-related companies (clothing, shoes, and accessories) are located in northern Italy.

Singapore is a well-known cluster for semiconductor materials. India‘s leading BPO firms are in Bangalore. Porter captures this phenomenon succinctly: ―Paradoxically, the enduring competitive advantages in a global economy lie increasingly in local things—knowledge, relationships, and motivation that distant rivals cannot match.‖ The Research Triangle Park (RTP) in North Carolina is bounded by the cities of Chapel Hill, Durham, and Raleigh. Several important cluster ingredients are readily apparent: top-notch research universities (The University of North Carolina at Chapel Hill, Duke University, and North Carolina State University); well-known MNEs (BASF, Bayer, Cisco Systems, Ericsson, and IBM, among others); good interstate highway connections; and an international airport. The RTP has one of the highest concentrations of PhDs worldwide, and it continues to attract the brightest students, researchers, and knowledge workers from around the world. The RTP contains two distinct clusters, a biopharma cluster and a communication–technology cluster. These two clusters are anchored by U.S. and foreign MNEs. The RTP‘s resident firms gain and sustain a competitive advantage based on innovation: they have generated more than 5,000 patents and well-known service and product breakthroughs such as UPC bar code, Astroturf, and 3-D ultrasound.

INTEGRATION Comprehension Case: ChapterCase— IKEA: The World‘s Most Profitable Retailer Here, we provide both Parts 1 and 2 of this case, accompanied by short-answer questions that students can complete and submit. Due to the nature of these open-ended questions, they require manual grading. 

Difficulty: Medium  Blooms: Apply

Strategy Highlights Strategy Highlight 10.1 Walmart Retreats from Germany, and German Ultra-Low-Cost Grocers Invade the United States Walmart entered Germany by acquiring the 21-store Wertkauf chain and 74 hypermarkets from German retailer Spar Handels AG. Walmart also entered Germany using the U.S. operation policy and procedures, such as the Walmart cheer and door greeters. As the strategy highlight discusses, this did not work well. Worse yet for Walmart, after the success that European Aldi has had in the United States, Lidl has also decided to cross the Atlantic and enter the U.S. grocery marketplace, thus competing on 18 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual Walmart‘s home front. Lidl has several dozen stores mostly on the U.S. East Coast. At the same time, Walmart is building its online capabilities and presence in efforts to compete against Amazon. Because groceries are about 60% of annual revenues, getting this right is crucial for Walmart‘s future success.

Strategy Highlight 10.2

Squid Game: Netflix’s Transnational Strategy South Korea has become a cultural center in Asia and beyond with the success of their TV and film (e.g., Squid Game, Parasite, Extraordinary Attorney Woo, Crash Landing into You), beauty (e.g., Soko Glam, Laneige), and music (e.g., BTS, Blackpink) offerings. Squid Game is a Netflix original series produced for the Korean market. As its major plot point, 456 adults in financial distress play common Korean children‘s games for the chance to win $40 million. Losing any game results in your death, and the sole survivor takes home the money prize. The TV show became a global sensation—an amazing feat given the significant cultural distance between Korea and most of the rest of the world. Netflix made some minor changes to have the show appeal to a global audience, and the result was a success for Netflix‘s transnational strategy. Netflix has produced additional international offerings from France, Spain, and Mexico with similar success. On the other hand, Disney pursues an international strategy and funnels their resources into billion-dollar franchises.

my Strategy Here, we encourage the student to take what they have learned about competitive advantage and apply it to his/her own career. Encourage students to spend a few minutes looking at themselves to discover their own competitive advantages.

How can you develop the skills needed to succeed as an international leader? Researchers have developed a personal strategy for building a global mindset that will facilitate success as an effective manager in a different cultural setting. A global mindset has three components: intellectual capital, the understanding of how business works on a global level; psychological capital, openness to new ideas and experiences; and social capital, the ability to build connections with people and to influence stakeholders from a different cultural background.

1.

As a baseline of your current position, list your strengths and weaknesses for each component.

2.

Identify your weakest area and make a list of activities that will help you improve your capital in that area.

3.

Identify at least three activities you could do this week to get started. For example, you could choose to work with international students on group projects in class. You 19

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Strategic Management, 6e Teacher‘s Resource Manual could go to a museum with an exhibit from another culture, a foreign film, or a restaurant with cuisine that is new to you.

If you are interested in more information, go to https://thunderbird.asu.edu/faculty-and-research/najafiglobal-mindset-institute, where you can find out about the Global Mindset Inventory (GMI) and other resources.

Remind students of what they learned in Chapter 4 about strengths and weaknesses of organizations and encourage them to apply it to this exercise. In particular, they should list both resources and competencies and they should evaluate them in comparison with those of other people who may be competing for the same jobs.

What resources and capabilities will they need three years from now? Encourage them to develop an action plan to improve their global mindset that incorporates measurable, actionable goals with specific time frames. Then ask them to develop a list of actions for this week, this month, and this academic year that will move them toward their goals.

Discussion Questions 1. Multinational enterprises (MNEs) have an impact far beyond their firm boundaries.

Assume you are working for a small firm that supplies a product or service to an MNE. How might your relationship change as the MNE moves from Globalization 2.0 to Globalization 3.0 operations?

One can consider the transition of business from vertical integration to vertical disaggregation. This transition is similar to moving from Globalization 2.0 to Globalization 3.0 operations. In Globalization 2.0, MNEs need only duplicate the operation in overseas markets, but this results in wasted resources. In the Globalization 3.0 stage, MNEs can select locations that suit their supply chain activities best, and then place the specific operation in that location. For instance, the finance function stays in New York, manufacturing stays in China, logistics in Hong Kong, R&D in Japan, and so on. Therefore, a Globalization 3.0 operation forms a network type of supply chain relationships inside, or even, outside of the organizational boundary. The relationship with the firm will shift. Instead of duplicated functions, your smaller firm may only maintain contact with headquarters or the primary activity within the MNE. As the MNE moves to Globalization 3.0, the smaller firm may need to change its own operations in order to respond to the MNE‘s changes. For example, if a function within the MNE moves to an overseas location, the small firm may need to adjust its own capabilities in order to continue working with them.

2. Strategy Highlight 10.1 discusses the failure of Walmart in Germany. Using the CAGE distance framework, discuss how Lidl should seek to be successful with its move into the US market.

Lidl entered the market using a strategy very similar to Aldi—smaller stores, few products, and a cost leadership strategy. This is likely to be a good advantage for Lidl to follow another firm with European culture into the U.S. market rather than being the pioneer. Geographically Lidl must set up a North 20 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual American supply chain and logistics system to continue its low-cost business strategy. The CAGE framework gives some insight into paths to success. First, the cultural distance is likely to be low.

Grocery stores (and low-cost grocery stores) are prevalent in the United States. The U.S. market will be familiar with the premise. However, one thing to note is that these low-cost grocery stores offer limited varieties of products, tend to be smaller, and focus on customers who do daily grocery shopping. The U.S. market is focused on a wide variety of products in large stores. In the United States, grocery shopping is often a weekly or monthly chore, and shoppers stock up and buy in bulk. This may add to the cultural distance. In terms of administrative and political distance, aspects such as an absence of shared currency may add to distance, but for the most part, the United States has a friendly relationship with Germany. Geographic distance is also likely to be higher—there is a lack of a common border, and different time zones are at play. Finally, the economic distance is likely to be slim. Germany is in a similar economic state to the United States, and consumers likely share more commonalities. The biggest hurdles to overcome likely stem from any cultural distance between U.S. and German shoppers, plus the geographic distance.

3. The chapter notes that global strategy can change over time for a firm. YouTube is one example in this chapter. Conduct a Web search of a firm you know to be operating internationally and determine its current global strategy position. How long has the firm stayed with this approach? Can you find evidence it had a different global strategy earlier?

We encourage students to research firms and industries in which they have a personal interest or experience. Instructors may suggest some of the many firms discussed in this chapter as examples for how their international strategy has changed over time and over different regions. Walmart is covered extensively in the chapter so other consumer brands such as McDonald‘s or Coca-Cola are better options for this question if instructors are making suggestions or assigning a firm to study.

TRM Extra: Ethical/Social Questions 1. Will the Globalization 3.0 strategy persist through the 21st century? If not, what will Globalization 4.0 look like? Several American companies such as Apple and GE have realized that they miscalculated the full cost of managing far-flung production operations and are bringing production back to the United States. Forbes magazine put the blame on managers who were focused on maximizing shareholder value rather than emphasizing the long-term future of the firm. That is, some managers looked only at labor costs and ignored the hidden costs of time and money trying to communicate quality and design concerns to workers across countries as well as unexpected costs to the supply chain from natural disasters or political threats. These factors combined with the new economics of energy (e.g., growing supply of natural gas) and new technologies (robotics, artificial intelligence, 3D printing, and nanotechnology) are rapidly changing manufacturing and management decisions.

1. Discuss the factors that managers of Apple or GE may consider as they focus on continuous innovation rather than the cost of manufacturing. How might governments with an interest in generating employment opportunities try to influence the decisions of firms? What other stakeholders may have an interest in bringing jobs back onshore and thus try to influence the decisions of firms? Consider the persuasive arguments and deals that might be struck. With changes to the location of production, what might Globalization 4.0 look like?

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Strategic Management, 6e Teacher‘s Resource Manual This question can be good for a small team discussion that is later shared with the whole class, or it could be done by inviting some students to role play a negotiation as government officials and firm executives. If a negotiation, one team of students (the firm) could prepare a list of resource needs for a new auto manufacturing plant. Two teams could be assigned as leaders of two different cities (one in the United States and one in China) trying to woo the firm‘s investment. They could argue the relative merits of their city, before settling into a set of negotiations with the firm. Another team might engage in the role play as the United Autoworkers or Teamsters. One issue that you might wish to bring into the dialogue to integrate this discussion with what students learned in their organizational behavior courses is what management teams will look like in Globalization 4.0. In Globalization 1.0 global operations were run out of headquarters by people of the headquarter country‘s nationality. In Globalization 2.0, headquarters‘ managers were sent out as expats to run global operations. In Globalization 3.0, we see the rise of local workers into executive positions. In Globalization 4.0 we are likely to see increased growth in third party nationals as executive leaders. In this model, firms tap into the best leadership talent wherever they find it, so that many executives are from neither the headquarters‘ country nor the host country. This is intended to be a longer-term viewpoint than the 3.1 retrenchment question raised in the chapter.

2. A race-to-the-bottom process may set in as MNEs search for ever-lower cost locations.

Discuss the trade-offs between the positive effects of raising the standard of living in some of the world‘s poorest countries with the drawbacks of moving jobs established in one country to another. Does your perspective change in light of the recent accidents in textile factories in Bangladesh, Cambodia, and elsewhere, where the cumulative death was over 1,000 workers? What responsibilities do MNEs have?

Students may refer back to the national advantage framework to understand why certain MNEs outsource the operation elements from low-cost countries. The trade-off is the increased cost structure to the MNEs while promoting brand image and goodwill in foreign markets. You might want to draw attention to the transient nature of cost advantages. As manufacturing grows, demand for manufacturing labor can lead to higher wages, slowly eroding the advantage of offshoring. Some people have argued that increased nationalism has also reduced the appetite for offshoring – however recent data does not confirm this argument. (see ―As Trade Tensions Grow, „Reshoring‟ of U.S. Supply Chains Sputters,” WSJ). However, COVID-19 lockdowns have highlighted how vulnerable industry is to global supply chains. This has made domestic manufacturing capabilities crucial to surviving uncertainty and disruption. Supply Chain Woes Prompt a New Push to Revive US Factories. Additionally, students should see worker safety as an important element of corporate social responsibility. However, supply chain majors could be asked to contribute to a discussion of how far back into the supply chain firms can reasonably be able to control safety. For example, it is easier to monitor Tier 1 suppliers with whom a firm has a direct buying relationship, than Tier 2 or Tier 3 suppliers.

TRM Extra: Small Group Acti vities 1) Many U.S. companies have become global players. The technology giant IBM employs over 350,000 people and has revenues of roughly $80 billion. Although IBM is headquartered in Armonk, New York, the vast majority of its employees (more than 70 percent) actually work outside the United States. IBM, 22 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual like many other U.S.-based multinationals, now earns the majority of its revenues (roughly two-thirds) outside the United States. Though IBM revenues have been dropping in recent quarters, its global business is still a major focus for the firm.

1a. Given that traditional U.S. firms like IBM have over 70 percent of their employees and almost two-thirds of their revenues come from outside the United States, what is an appropriate definition of a ―U.S. firm‖?

Ask the students to discuss what the pros and cons are surrounding where a firm is incorporated. The students may note that a firm‘s core competence or core value chain activities may remain at their home base while the firm moves its lower-valued activities overseas.

1b. Should IKEA be considered a Swedish firm with less than 6 percent of sales garnered from the Swedish market? Discuss why or why not in your groups.

IKEA‘s operating headquarters is in Sweden and its owners and management team are Swedish, which gives the firm a Swedish culture. However, its warehouses, stores, and manufacturing operations are spread throughout the world, making it more reasonable to consider the firm a global company.

1c. Is there any special consideration a firm should have for its ―home country‖? Is it ethical to keep profits outside the home country in offshore accounts to avoid paying domestic corporate taxes?

Challenge students to identify the social and ethical arguments about where the firm is incorporated and where it conducts operations. Offer hints, such as job creation, unemployment rate, economic growth, standard of living, and so on. Encourage them to consider not only supply-side issues, such as labor costs, but also demand-side issues, such as where customer demand is growing.

Ask students to describe their ethical value system that they use to assess whether an action is ethical.

Do they base their values on utilitarian (greatest good for greatest number) or justice (social goods distributed equally) theories? Does their view of shifting jobs to another country change when it is a shift from ―haves‖ to ―have nots,‖ such as jobs moving from the U.S. to Bangladesh, versus a shift from ―haves‖ to ―haves,‖ such as moving from the U.S. to Germany?

Engage your accounting students in a discussion of the international issues in both tax evasion (sometimes the purpose of offshore accounts) and tax avoidance, such as delaying or avoiding repatriation of foreign earnings or taking advantage of Ireland‘s favorable corporate tax structures.

(Some in the EU think Ireland‘s tax benefits were too generous and it has been forced to change many tax advantages. Apple has been a particular target of the EU over tax arrangements with the Irish government for many years (see ―Apple Can‘t Win Its $14 Billion European Tax Battle,‖ WSJ).

2) In this exercise, we want to apply the four types of global strategy. Imagine your group works for Clif Bar (www.clifbar.com). Founded in 1992, the firm makes nutritious, all-natural food and drinks for sport and healthy snacking. Clif Bar is a privately held company with over 800 employees. About 20 percent of the company is owned by the employees through an employee stock ownership plan (ESOP).

The vast majority of Clif Bar‘s sales are in the United States. The firm has some distribution set up in Canada (since 1996) and the United Kingdom (since 2007). As of 2020, Clif Bar sells limited products 23 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual in about 11 other countries: Australia, Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, and New Zealand.

Review the company‘s website and news articles for more information about the firm and its products.

2a. Apply the CAGE distance framework to the foreign countries where Clif Bar is operating.

What is the relative distance of each to the United States? Rank the order of the countries in terms of relative distance.

Calculating the exact ordering of the countries using the model requires a paid subscription to the CAGE model. If your university does not have a subscription, the students can still have a good discussion. The website does provide some examples that can be accessed for free and offer a great illustration of how the model works. Show an example, comparing say Australia to Spain, then ask the students to use what they know about each of the six countries to estimate their relative distance to the U.S. 2b. Given the results from the CAGE model, do the chosen countries make sense? Why or why not?

Clif Bar is likely to find Japan to be a more challenging market for them than Canada. Ask students to identify which of the factors in the CAGE model might be particularly important for food products and how these two countries differ on those criteria. With some research students can discover that Clif Bar entered and left the Japanese challenging market.

2c. Can you recommend three or four other countries Clif Bar should enter? Support your recommendations.

Clif Bar has presence in several commonwealth countries, so expansion to other commonwealth countries may have cultural and administrative similarities. Students may suggest Mexico as a logical place for further international growth, due to its proximity to the United States.

2d. What entrance strategy should the firm employ in expanding the business to new countries? Why? Refer to the international entry stage model (Exhibit 10.7) and discuss. Clif Bar may simply choose exporting. The entry mode should vary to some extent based on the conditions in the target country.

Mexico has a close proximity to the United States. India has a lower income level. Germany is a developed country where purchasing power is higher and may have strict policies and demand.

Related MiniCase Instructors may want to consider assigning and discussing the following MiniCase, which covers topics found in this chapter. Every MiniCase has assignable McGraw Hill Connect® case questions available.

MiniCase 10: Apple Inc.

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Strategic Management, 6e Teacher‘s Resource Manual

Organizational Design: Structure, Culture, and Control Teacher Resource Chapter Contents Teacher’s Resource Manual (TRM): Implementation Guide

ii

Learning Objectives

1

Textbook Chapter Contents

2

Chapter Teaching Resources

3

Overview of Chapter

5

Classroom Outline

7

Strategy Highlights

19

myStrategy

20

Discussion Questions __________________________________________20 TRM Extra: Social/Ethical Questions

21

TRM Extra: Small Group Activities

23

Related MiniCase

24

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Strategic Management, 6e Teacher‘s Resource Manual

Teacher’s Resource Manual: Implementation Guide This Teacher‘s Resource Manual (TRM), supports delivery of your chosen curriculum and pedagogy.

This manual contains more than just guidance on how to cover concepts discussed in the sixth edition of Strategic Management; it also provides tips and best practices for how to utilize the full product suite (from the textbook to SmartBook® to Connect®). In addition, this manual includes a variety of supplemental teaching resources to enhance your ability to create an engaging learning experience for your students. Regardless of whether you teach in face-to-face traditional classrooms, blended (flipped) classrooms, online environments, or hybrid formats, you‘ll find everything you need in this improved resource.

The TRM follows the order of the textbook outline for each chapter and is divided into sections for each learning objective. Each section identifies the relevant PowerPoint slides from both the Lecture slides and the Supplemental Lecture slides (more on this below). This eases your preparation time for class as you can adjust slides as needed to ensure your students stay actively engaged throughout each session.

WHAT INSTRUCTOR RESOURCES ARE AVAILABLE? Within each section of the TRM you will find an assortment of examples, exercises, Connect® assignments, updates on the latest research, Strategy Smart Video discussions, and discussion questions and exercises from which you can choose to enhance your students‘ learning and engagement.

Within the Connect® Library, you will find the following: In the Test Builder tab, you can create tests from the Test Bank that can be printed or administered within your LMS. In the Instructor Resources, you can access all of the following items:         

Teacher‘s Resource Manual PowerPoints (Accessible) Application-Based Activities‘ accompanying Teaching Notes Create™ Case Support MiniCase Support Sample Syllabi Video Library Capsim‘s Capstone Simulation and Capsim IM Image Bank (for your customized PowerPoints)

71) This Teacher‘s Resource Manual is posted by chapter.

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Strategic Management, 6e Teacher‘s Resource Manual 72) Two sets of ADA-accessible PowerPoints are available with each chapter: a. Lecture slides cover chapter concepts and exhibits. b. Supplemental Lecture slides cover: i. ii. iii. iv.

Chapter Cases Strategy Highlights Implications for Strategic Leaders Strategy Smart Video selections (not part of the book, but an additional resource found here) v. Key Terms

73) Test Bank questions, found in the Library tab entitled Test Builder, are posted by chapter. You will find a variety of question types within the test bank such as Matching, Ranking, Multiple Choice, Select-All-That-Apply, True/False, Short Answer, and Essays to test student mastery across Bloom‘s Taxonomy (i.e. Understand, Apply, and Analyze).

74) Create™ Case Support (all cases are available in Create™ and selected ones in HBP) a. A case matrix that identifies the industry sector covered by each case, as well as the primary and secondary chapter alignments b. One-page case abstract for quick overview of each case c. Case Teaching Notes for instructor use only d. Case Financials in Excel files for the exhibit data in the most popular cases e. Case Strategic Financial Analysis template f. Instructions on How to Download SEC Financial Data into Excel Spreadsheets 75) MiniCase Support (all MiniCases are located in Part Four of the book) a. MiniCase Teaching Notes comprising suggested answers to the MiniCase discussion questions. In some instances, they also provide specific additional article and video resources to accompany each MiniCase.

76) Video Resources, located in the Video Library, provide links to supplemental video resources to accompany both the MiniCases and full-length Create™ cases, as well as links to all of the assignable videos in Connect®.

77) A link to Capsim’s Capstone Simulation and a Capsim Instructor’s Manual correlated to Strategic Management is provided; this simulation allows students to apply their knowledge of key strategy concepts.

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Strategic Management, 6e Teacher‘s Resource Manual

HOW CAN SMARTBOOK® ENHANCE MY STUDENTS’ PERFORMANCE? SmartBook® is assignable through Connect®, McGraw Hill‘s online assignment and assessment system.

One of the first fully adaptive and individualized study tools designed for students, it creates a personalized learning experience, giving students the opportunity to practice and challenge their understanding of core strategy concepts. The reporting tools within SmartBook® show where students are struggling to understand specific concepts.

Typically, SmartBook® is assigned by module (chapter), and instructors can set which learning objectives to cover as well as the number of probes the student will see for each assignment. Instructors also set the number of points a SmartBook® module is worth in the course. Usually, applying a minimal number of points for completion of each module is enough to encourage students to read the chapter.

Many instructors assign these modules to be completed before the class or online session.

SmartBook® provides several diagnostic tools for instructors to gauge which concepts their students struggle to understand. Below is the set of adaptive assignment reports available in SmartBook®:      

Progress Overview: View student progress broken down by module.

Student Details: View student progress details plus completion level breakdown for each module.

Module Details: View information on how your class performed on each section of their assigned modules.

Practice Quiz: This gives you a quick overview of your students‘ quizzes results.

Missed Questions Metacognitive Skills

By selecting ―Module Details‖ the instructor finds the results for the students in the class overall. These details reveal where in the chapters students might be struggling. The module gives the chapter section, average time spent, average questions per student correct/total, and the percentage of correctness (number of assigned items). Information about the most challenging sections for students can help instructors refine the focus of the next classroom or online session.

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Strategic Management, 6e Teacher‘s Resource Manual For more detailed analysis, SmartBook® captures students‘ confidence in their competency using the ―Metacognitive Skills‖ report. Below (a recreation of the Metacognitive Skills report), we find the second student is confident and mostly correct (91% in the correct & aware column) while the first student ―doesn‘t know what she doesn‘t know‖ (39% in the far-right column).

STUDENT

Student 1 Student 2 Student 3 Student 4 Student 5 Student 6 Student 7 Student 8 Student 9 Student 10

CORRECT and AWARE 61% 91% 81% 83% 76% 66% 77% 91% 93% 70%

CORRECT and UNAWARE 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

INCORRECT INCORRECT and AWARE and UNAWARE 0% 39% 3% 5% 0% 19% 0% 17% 3% 21% 9% 25% 3% 20% 2% 7% 2% 5% 6% 25%

APPLICATION EXERCISES, QUIZZES, AND TEST BANK What resources are available at the book level?

Connect® offers a wealth of content for both students and instructors. Application Exercises require students to apply key concepts to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor. Before getting into chapter-level assignments, let‘s look at the book-level assignments available.

Four exercises are available for instructors to assign beyond the chapter materials. These are 1) MiniCase Case Analyses, 2) Case Exercises, 3) Financial Ratio Reviews, and 4) MyStrategy exercises.

The Financial Ratio Reviews and MyStrategy exercises comprise our new Student Primer in Connect.

41) To encourage analytical thinking, each MiniCase from Part Four of the book is also an assignable application exercise (MiniCase Case Analysis). Each MiniCase is followed by four to five multiple-choice questions that assess students‘ understanding of the key issues presented in the MiniCase.

42) Case Exercises focus on the key symptoms and influences of a problem a firm might be facing, followed by a series of questions that help students understand how the firm eventually achieves a solution to that problem (or asks students to suggest a solution).

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Strategic Management, 6e Teacher‘s Resource Manual 43) Financial Ratio Reviews give students the opportunity to further hone their financial analysis skills; review exercises cover each type of financial ratio (activity, leverage, liquidity, market and profitability).

44) MyStrategy exercises for each chapter provide direct personal applications of strategy concepts to careers and lives to help students internalize the content.

What resources are available for each chapter and how should I integrate them in my course?

Consider assigning one or two Application Exercises per chapter. They are built around chapter learning objectives, so the instructor can choose based on their focus for each specific chapter. Several types of application exercises are available in each chapter. The newest additions are our Animated Videos, comprising three- to four-minute videos on key concepts or concepts that tend to challenge students the most. Each animation is accompanied by three to four multiple-choice questions to check student attention and comprehension. Comprehensive Case Analyses and our new On-Location Video Cases feature firms and industries different than those discussed in the textbook and provide relevant, topical information for students. Finally, Click-and-Drag exercises help students actively demonstrate their understanding of the associated learning objectives. Application Exercises can be assigned as preparatory exercises due before class (this is especially good for flipped classrooms), or after class as concept comprehension checks. Applications Exercises will generally be assigned as homework or practice as part of the overall class grade. A general rule of thumb would be to make application exercises worth 5 to 10 points each since these require time and thought.

To find the Applications in Connect®, go to ―Add Assignment‖ and then select ―Question Bank.‖ Application Exercises are organized by chapter. Instructors have the option to select for one attempt only, but they may want to give students unlimited or multiple attempts on the first few assignments to give students a chance to learn and navigate the system. (As the course progresses, instructors may want to tighten up the time on task and reduce the number of attempts to complete each exercise).

Chapter quizzes and full chapter test banks are available for assignment, and like the Application Exercises, are organized by chapter. The value applied to each question should be relatively low because numerous questions are usually assigned for each chapter. As such, make these questions worth 1 or 2 points each. The feedback given to students is time-flexible. Selecting feedback to be displayed after the assignment due date helps to keep students from giving the correct answers to other students while the questions are still available. For this reason, it is suggested that no feedback to quizzes and test bank exams be made available until after the assignment is due.

When should I assign these digital components?

To fully utilize the power of the digital components, instructors will often assign the SmartBook® reading and adaptive learning probes before class meets. Application Exercises can be completed either before or after class; if they are completed before class, they can sometimes serve as good springboards for class discussions. The chapter quiz makes a good check on comprehension of the material and may work best if assigned after each class period. The test bank serves as a good resource for building midterm or final exams.

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Strategic Management, 6e Teacher‘s Resource Manual More detailed information on SmartBook® and Connect® is available through several resources at McGraw Hill. A good starting point is your local Learning Technology Representative, who can be found here: http://www.mheducation.com/highered/platforms/connect/features-educators.html

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Strategic Management, 6e Teacher‘s Resource Manual

COURSE PREPARATION Helpful Suggestions Regarding Assignment Policies: Connect® gives instructors a wide array of flexibility in making assignments and creating grading policies. Instructors may choose to: 

assign as many assignments as appropriate given the level and time commitment expected for the class,



determine point values for each question/application that works within the total course percentages,



make available multiple attempts per assignment with options of accepting the highest score or averaging all the attempts together (several attempts are particularly good for homework assignments),



deduct points for late assignment submissions (percentage deduction per hour/day/week/etc.) or create hard deadlines thus accepting no late submissions,



show feedback on application/questions immediately upon submission or at the time the assignment is due for the whole class, create new assignments or questions from scratch, or edited versions from a variety of provided resources.

Throughout the TRM for each chapter, we will integrate materials from the Lecture PowerPoint slides, Supplemental Lecture slides, Connect® Application Exercises, and MiniCases. This integration of resources will allow for a cohesive presentation of the relevant resources at your disposal, helping you to convey these topics effectively and efficiently to your students.

.

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Strategic Management, 6e Teacher‘s Resource Manual

CHAPTER 6 Learning Objectives 11-1

Define organizational design and list its three components.

11-2

Explain how organizational inertia can lead established firms to failure.

11-3

Define organizational structure and describe its four elements.

11-4

Compare and contrast mechanistic organizations and organic organizations.

11-5

Describe different organizational structures and match them with appropriate strategies.

11-6

Evaluate closed and open innovation, and derive implications for organizational structure.

11-7

Describe the elements of organizational culture, and explain where organizational cultures can come from and how they can be changed.

11-8

Compare and contrast different strategic control-and-reward systems.

This chapter discusses the importance of organizational structure and culture as well as their impact on a firm‘s competitive advantage. Organizational culture and structure are considered important because of organizational inertia, which is a firm‘s inability and resistance to change. Students need to understand that the strategic fit between a firm and its environment is not static but rather dynamic. That means the environment changes all the time and so should the firm. In order to adapt successfully, a firm needs to change its strategy and also frequently its structure and culture. This chapter also discusses mechanistic and organic organizations as well as different types of common organizational structures. The chapter concludes with a discussion of organizational control and its relation to organizational culture.

A chapter opening case on Alphabet, the parent company for Google, and two strategy highlights are included in the chapter for tangible applications of the theoretical frameworks discussed.

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Strategic Management, 6e Teacher‘s Resource Manual

Text Chapter Contents Chapter Case 11: ―A‖ Is for Alphabet and ―G‖ Is for Google 11.1 Organizational Design and Competitive Advantage (LO 11-1, LO 11-2. LO 11-3, LO 11-4) CONNECT® INTEGRATION Multiple Choice: Organizational Design CONNECT® INTEGRATION Ranking: Organizational Design and Inertia 11.2 Strategy and Structure (LO 11-5) Strategy Highlight 11.1: Zappos: Of Holacracy and (Not Much) Happiness CONNECT® INTEGRATION Case Analysis: Strategy and Structure CONNECT® INTEGRATION Whiteboard Video: Strategy and Structure 11.3 Organizing for Innovation (LO 11-6) Strategy Highlight 11.2: Sony vs. Apple: Whatever Happened to Sony?

CONNECT® INTEGRATION Case Analysis: Kroger—Organized for Innovation 11.4 Organizational Culture: Values, Norms, and Artifacts (LO 11-7) CONNECT® INTEGRATION Case Analysis: Chick-fil-A Lives Its Values 11.5 Strategic Control-and-Reward Systems (LO 11-8) 11.6 Implications for Strategic Leaders ChapterCase 11 / Part II CONNECT® INTEGRATION Comprehension Case: “A” is for Alphabet and “G” is for Google

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Strategic Management, 6e Teacher‘s Resource Manual

Chapter Teaching Resources SECTION

Title

RESOURCE TYPE

CHAPTERCASE 11

―A‖ Is for Alphabet and ―G‖ Is for Google G is for Google

Larry Page‘s Blog Entry

Organization Design

Web Video (2 mins)

Organizational Design

Connect® Multiple Choice Exercise

Organizational Design and Inertia

Connect® Ranking Exercise

How Zappos will run with no job titles

Online Video (4 mins)

Strategy and Structure

Connect® Case Analysis

Strategy and Structure

Connect® Whiteboard Video

MiniCase 11: Chick-fil-A‘s Structure, Culture, and Control

Rothaermel Textbook

Fostering an Innovation Culture: Talent, Discipline and Leadership)

WSJ Article

Companies Think They Want New Ideas, But They Don‘t Act Like It

WSJ Article

What‘s Happening to Sony? (The Rise and Stagnation of Sony)

Online Video (14 mins)

Kroger: Organized for Innovation

Connect® Case Analysis

Chick-fil-A Lives Its Values

Connect® Case Analysis

Corporate Culture Apple example

Online Video (4 mins)

11.1: Organizational Design and Competitive Advantage

11.2: Strategy and Structure

11.3: Organizing for Innovation

11.4 Organizational Culture: Values, Norms, and Artifacts

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Strategic Management, 6e Teacher‘s Resource Manual Steve Jobs || Organization Culture at Apple

Online Video (3 mins)

At Netflix, Radical Transparency and Blunt Firings Unsettle the Ranks

WSJ Article

Ethical/Social Issues: Winning at all costs

TRM Extra

Drive: The surprising truth about what motivates us. RSA Animate.

Web Video (11 mins)

Ethical/Social Issues: Short Term Focus

TRM Extra

What is an OKR?

Web Video (2 mins)

Small Group Exercise: ROWE at your University

TRM Extra

How the Washington Post has changed under Jeff Bezos

Online article/video

Small Group Exercise: Organizational options for small business

TRM Extra

―A‖ Is for Alphabet and ―G‖ Is for Google

Connect® Comprehension Case

11.5 Strategic Control-and-Reward Systems

11.6: Implications for Strategic Leaders

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Strategic Management, 6e Teacher‘s Resource Manual

Overview of the Chapter 11.1

Organizational Design and Competitive Advantage Organizational design is the process of creating implementing, monitoring and modifying the structure, processes, and procedures of an organization. Because implementation transforms strategy into actions, it often requires changes within the organization. One of the key challenges is overcoming organizational inertia. Exhibit 11.2 illustrates how organizational inertia can impede a firm‘s ability to respond to internal or external shifts in the environment. Exhibit 11.3 differentiates mechanistic organization from organic organizations among the key building blocks of the organizational structure. To gain and sustain competitive advantage, structure must follow strategy.

11.2

Strategy and Structure As with strategy, organizational structure is not a static choice. Exhibit 11.4 plots the trajectory of four forms organizational structure with the increasing complexity correlated with firm size.

The four types of structures are: Simple, Functional, Multidivisional (M-form), and Matrix.

11.3

Organizing for Innovation A key question for firms is how to organize for innovation. Integral in this discussion is the form of the innovation—closed innovation refers to tradition in-house R&D while open innovation seeks to broaden the sources of innovation to include customers, suppliers, universities, and even competitors. The differences of these models are shown in Exhibit 11.12.

Exhibit 11.13 contrasts the principles of closed and open innovation. Finally, Strategy Highlight 11.2 explores the example of Sony vs Apple.

11.4

Organizational Culture: Values, Norms, and Artifacts Discussions of corporate culture permeate business literature. It is important to recognize the issues of values, norms, and artifacts that must be considered in the formal and informal building blocks of organizational design. Exhibit 11.15 uses concentric circles to represent these building blocks. Frequently, a firm‘s core value derives from the founder. This is called founder imprinting and is illustrated with an example from Google in Exhibit 11.16. Another influence on the culture is the connection of a firm‘s values with its reward system. Strategy Highlight 11.1 discusses this connection at Zappos. While a firm‘s culture can be one of its strongest assets, when stagnant it can become its greatest liability. Changing a firm‘s culture which is locked in inertia is primarily addressed by replacing the executive leadership. There are cases where a firm‘s culture actually provides a competitive advantage (e.g., Southwest Airlines).

11.5

Strategic Control-and-Reward Systems The internal governance mechanisms put in place to align the incentives of principals (shareholders) and agents (employees) are the key building blocks when designing organizations for competitive advantage. An example of a company well defined control-and-reward system is Google. Their Objectives and Key Results (OKRs) framework combines data analysis with the 5

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Strategic Management, 6e Teacher‘s Resource Manual latest research in behavioral economics and psychology. The controls portion of these mechanisms can be divided between input controls and output controls. Budgets and Standard Operating Procedures are frequently used as an input controls. The output is controlled by the alignment of rewards with performance expectations. In order to support creativity and innovation, the framework of results-only-work-environment (ROWE) is an attempt to tap into intrinsic motivation of employees. Intrinsic motivation is at its highest when the employee is convinced of the autonomy, mastery and purpose of the task they are performing.

11.6

Implications for Strategic Leaders While formulating an effective strategy is necessary, it is not sufficient for gaining and sustaining a competitive advantage. Strategy execution is at least as important for success. The key levers available to strategic leaders are structure, culture and control. The organizational design must address and adapt to the firm‘s complexity and need for innovation. ChapterCase 11/ Part 11 investigates the evolving organization of Google.

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Strategic Management, 6e Teacher‘s Resource Manual

Classroom Outline ChapterCase 11 “A” Is for Alphabet and “G” Is for Google The opening ChapterCase explores the unconventional growth of Google and examines the creation of Alphabet to manage the diverse portfolio of strategic business units (SBUs) that had been created within the Google umbrella. Larry Page modeled the new organizational structure after that of Berkshire Hathaway. The Alphabet structure seeks to provide financial transparency and accountability for each SBU while allowing Alphabet to continue radical innovation, placing significant capital bets on new technologies. The SBUs are run by independent CEOs allowing Alphabet to develop and retain a cadre of top-notch executives for various leadership roles in the organization.

INSTRUCTOR SUPPLEMENT SLIDE 3

ChapterCase 11 Part II The closing ChapterCase provides more information on challenges facing Google that they are seeking to address with the introduction of the Alphabet organization. Currently, the Google portion of the new organization drives 99% of the company‘s profits. However, competition of on-line advertising from Meta and new in-roads from Amazon threaten Alphabet‘s profits and market share.

ChapterCase 6 Discussion Questions 1. Why did Google restructure itself and create Alphabet? What is it hoping to accomplish?

For additional insights, see Larry Page‘s post announcing the restructuring at https://abc.xyz/.

While 99 % of profits are still provided by the organic Google businesses, Larry Page wanted to create an organization that would support radical innovation. The ―traditional‖ Google business of online advertising was facing increased competition both from Facebook‘s growth as well as the new entrant from Amazon. By harvesting the intrinsic motivation of employees that could be subsequently combined with significant capital support and financial transparency, he hopes to create a sustained advantage of managing disparate SBUs perhaps ―similar‖ to that of Berkshire Hathaway. As Alphabet has grown, this structure is necessary to continue to facilitate radical innovation.

10. Do you think the reorganization is beneficial for Alphabet‘s moonshots, now housed in their own business unit with profit-and-loss responsibility? Why, or why not? Explain.

The structure should allow Alphabet to recruit, develop and retain a ―deep bench‖ of top-notch executives. If these strategic leaders are provided with the resources and independence to develop and 7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual sustain competitive advantage at the SBU level, it could well provide a platform for long term growth. A critical component will be the ―corporate control‖ activities deciding when an SBU should be allowed to continue to evolve, when to double down on a bet and when a leadership change is needed. Not all SBUs are going to succeed. In this way the ―portfolio management‖ analogy to Berkshire Hathaway is valid. Additionally, this reorganization may put Alphabet in a better position to foster and nurture the development of new products and services through planned emergence.

5. Why has Google ―failed‖ to develop other profitable businesses? Is Google‘s strategy process of planned emergence to blame? Why or why not? Will Alphabet‘s new structure with independent SBUs enable the company to innovate more and to find the next highly profitable business beyond online search and advertising?

Google‘s strategy of planned emergence contained problematic components of organization artifacts and inertia. Essentially, before Google became Alphabet, top executives felt social networking did not fit with the company‘s core value to ―organize the world‘s information and make it universally available.‖ They failed to recognize that crowd sourcing and personal interchanges were not only types of information, but types that could be made available in channels that could drive significant online advertising. The restructuring and organization is more than just creating new reporting relationships and organizational structure. It‘s also creating a new identity that may help their leaders and employees in not being so short-sighted. With capable strategic leaders of the other business units formulating and executing well designed strategies, Alphabet certainly has the potential for success beyond the Google‘s core business. The creation of independent SBUs may open Alphabet‘s horizon to new opportunities that will help it move beyond it‘s complete reliance on Google.

11.1 Organizational Design and Competitive Advantage LO 11-1 Define organizational design and list its three components.

LECTURE SLIDES 3–10 EXAMPLES Students should be quite familiar with the Nintendo Switch, Sony PS5, and MS Xbox Series X. While Sony and MS focused on die-hard gamers with all the graphics and technological features, the companies largely ignored the casual gamers, which could help Sony and MS broaden their customer base. This can be viewed as an organizational inertia example. Only after about five years of Nintendo capturing latent demand did both Sony and MS introduce motion detection devices that are similar to Wii Remotes, which means finally the companies ―woke up‖ and realized that the casual gamers should not be ignored. However, Nintendo already established a first-mover‘s advantage in the market niche. A larger problem for all three firms is the consumers‘ move away from consoles to play online games from PCs and mobile devices. While Nintendo is currently seeing success with its Switch Lites, Sony and Microsoft have yet to successfully capture market share in this area. Time will tell how this market evolves and how effectively the three firms break from organizational inertia to respond to it.

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Strategic Management, 6e Teacher‘s Resource Manual DISCUSSION TOPICS The chapter notes that changing an organizational culture is daunting and provides an example of Yahoo. What other firms have attempted to change their culture in recent years? What techniques did they use for the transition? Was it successful?

Interestingly, both Michael Dell (Dell Computer) and Howard Schultz (Starbucks) have come back into operational roles after retiring as founders. In both cases, they are trying to bring back some of the original culture and passion that was key to their earlier success. Some students are likely to have been Starbucks customers for several years. Ask them what changed in the external environment that required structural and cultural changes in the firm. They should be able to identify new competitors (McDonald‘s, many smaller coffee shop chains) and reinvigorated competitors (Dunkin‘ Donuts). They should also note the internal shift caused by Starbucks‘ rapid growth, international expansion, and changing labor relations with employees. Ask them to identify the changes Starbucks has made and their assessment of how well the changes have enabled the firm to prosper in the changed environment.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 14 All of the elements of an organization‘s design—structure, reward systems, culture, and leadership style—are interrelated. This two-minute video discusses how structure influences a culture of innovation.

LO 11-2 Explain how organizational inertia can lead established firms to failure.

LO 11-3 Define organizational structure and describe its four elements.

The four key elements of organizational structure are specialization, formalization, centralization, and hierarchy. Instructors may use examples to facilitate student learning. In terms of specialization, the U.S. military can be used as an example here because it has the Air Force, Army, Navy, and Marines, and all of them have their own specialties. Instructors can use McDonald‘s as the example for formalization because of the standardized operation process. British Petroleum can be used for centralization because of the Gulf Oil Leak crisis which indicated that the strategic decision-making authority of top management leads to a slow response to environment changes. Every government has a hierarchical structure, and it can be used as the example here for hierarchy.

Due to significant advances in information technology, organic organizations frequently use virtual teams. In these teams, geographically dispersed team members can collaborate through electronic communications such as e-mail, instant messaging, intranets, cloud computing services, and video conferencing. Given time differences, virtual teams often organize workflow so that projects can be pushed forward 24 hours a day, seven days a week. Use of virtual work and collaboration technologies has enabled companies to be more nimble and to employ flatter and more decentralized organizational structures. Research data show that the largest 30 companies by market capitalization used networked digital technologies to double productivity per employee, despite more than doubling the number of employees. In the decades prior to the widespread use of computer-mediated work, employee productivity remained more or less flat.

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Strategic Management, 6e Teacher‘s Resource Manual LO 11-4 Compare and contrast mechanistic versus organic organizations.

DISCUSSION TOPICS W. L. Gore is given as an example of organic organizations. McDonald‘s is an example of a mechanistic organization. Within one industry Google is an organic organization, while Microsoft is more mechanistic. Pixar is a more organic structure than the theme park organization is, both within Disney.

Ask students to identify other firms they know of that are mechanistic or organic and connect the choice of structure to the firm‘s need for greater reliability or greater innovation.

Ask students to pair up and compare the two firms that they work for (or the university if they are not employed) on each of the criteria listed in Exhibit 11.3. Then ask each team to share with the class one point in the format of ―Jane‘s firm is more mechanistic than Joseph‘s firm in a number of ways, particularly because it has twice as many layers of hierarchy.‖ It may also be interesting to have students compare multiple firms in an industry. Before you begin the exercise, have students make a general prediction of what type of structure an industry would favor. After students research multiple firms in an industry, have them reconvene and compare notes. Does the industry favor one type of organization over another? If so, why? If not, why?

INTEGRATION Multiple Choice: Kroger—Organizational Design This exercise will help students to understand three components of organizational design and to be able to explain how apathy can lead well-known companies to failure. 

Difficulty: Medium

 Blooms: Analyze

INTEGRATION Ranking: Organizational Design and Inertia This exercise underscores the importance of how by changing an organization‘s structure, companies can achieve greater profitability and are better able to respond to opportunities within their respective industry. 

Difficulty: Medium  Blooms: Analyze

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11.2 STRATEGY AND STRUCTURE LO 11-4 Describe different organizational structures and match them with appropriate strategies.

LECTURE SLIDES 11–26 In this section, we get an understanding that structure follows strategy for students to have a better understanding of the AFI framework. First, effective structure provides stability and flexibility. The stability is needed when a firm is implementing the strategy because it implies the capacity required to consistently and predictably manage daily work routines when actualizing strategy. The flexibility provides for the opportunity to explore competitive possibilities and the allocation of resources to activities that shape needed competitive advantages. Those two characteristics are critical for implementing strategy. Further, structure follows strategy also implies that organizational structure can be dynamic because strategy is dynamic in nature. Firms need to find an appropriate structure for the time being when initiating strategic change. In sum, strategy and structure have a reciprocal relationship.

DISCUSSION TOPICS The multidivisional structure centers on the use of separate businesses or profit centers. The M-form is used by many organizations that compete in the global economy. General Electric is an example of a company that uses this structure. Each unit is operated as a separate business with its own corporate staff, including its president. Some parent companies do little more than provide capital and guide units to an organization-wide strategy. The overall goal is to maximize the organization‘s performance. In order to accomplish this, managers at the parent company use a combination of strategic and financial controls to ensure the function across divisions.

Exhibit 11.10 can be useful to make the connection for the students between the content of this chapter and that of Chapter 10. You can use whichever case examples you used while discussing global strategy and ask the students to explain which organization structure would be the best fit for that firm.

The matrix structure can be controversial. We ask in the class what type of organizational structures our students are familiar with. Some of them have worked in matrix organizations. The feeling of having ―two bosses‖ is a common problem with this structure. Ask them how the tension between their responsibilities affects their effectiveness and motivation at work.

EXAMPLES Google‘s acquisition of Nest prompted it to allow its various units more autonomy to support its innovation strategy (see ―At Google, Breathing Room for New Ideas,‖ WSJ).

As start-up companies grow, they often find that they need a more hierarchal structure, thus they begin to add middle management layers (see ―Radical Idea at the Office: Middle Managers,‖ WSJ).

Due to the COVID-19 pandemic, remote work became the norm for many employees (see New Data ―Show Broad Shift to Remote Work During Pandemic,‖ WSJ). How has remote work impacted organizational structure? If students have limited work experience, have them reflect on the experience of remote instruction/online courses during the pandemic. This may be a good discussion about how organizations face both internal and external impetuses to change.

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Strategy Highlight 11.1 Zappos: Of Holacracy and (Not Much) Happiness Click here for a summary of the Strategy Highlight covering the unusual organizational and cultural character of Zappos.

DISCUSSION TOPICS This case is a great opportunity to highlight some HR concepts within the broader context of strategy.

Ask students to describe why Zappos‘ is struggling to implement the holacracy. If Zappos can‘t do it, can any organization operate in this manner? Ask students with HR experience, training, or majors to comment on their professional opinions as to why this structure is not bringing happiness to Zappos.

Students will likely focus on ambiguity (e.g., lack of clear paths for advancement), decision-making within the organization, and wasted resources (e.g., more time in meetings).

INSTRUCTOR SUPPLEMENT SLIDE 5: ZAPPOS: OF HAPPINESS AND HOLACRACY STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 17 This slide has a link to a four-minute video discussing how it works to be an employee with no job title in the Zappos holacracy.

INTEGRATION Case Analysis: Strategy and Structure This case analysis starts with a case comparing two very different yet successful firms. The case brings out several points on their company structure and also their strategy. The student must read the textbook and also the case provided here before completing the accompanying questions.

Follow-Up Activity: The instructor can expand on the concepts from this interactive by discussing the importance of the alignment of strategy and structure for a variety of example firms. Small Group Exercise 1 in the end of chapter material might be another way to get students thinking about these questions. In this small group, students are asked to think about structures needed for two different kinds of start-up firms. 

Difficulty: Medium  Blooms: Apply

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INTEGRATION Whiteboard Video: Strategy and Structure Organizational design is both driven by and helps to drive strategy. The formal organizational structure controls the flow of information and should be dictated by a firm‘s strategy, but it also determines which problems are seen and solved. 

Difficulty: Medium

 Blooms: Analyze

11.3 ORGANIZING FOR INNOVATION LO 11-6 Evaluate closed and open innovation, and derive implications for organizational structure.

LECTURE SLIDES 27–28 DISCUSSION TOPICS ―Despite the fact that innovation cultures are desirable and that most leaders claim to understand what they entail, they are hard to create and sustain,‖ says HBS professor Gary Pisano (see ―Fostering an Innovation Culture: Talent, Discipline and Leadership,‖ WSJ). For additional information see ―Companies Think They Want New Ideas, But They Don‘t Act Like It,‖ WSJ). Given this background and the topics covered in Section 11.3, what factors of organizational structure are critical to create and sustain innovation?

How has the broad shift to remote work during the pandemic impacted organizational innovation? On the one hand, the chapter discusses that behavior and discoveries from employees are an important source of innovation. Collaboration is often seen as an important antecedent to innovation – is this still achievable in a virtual format? Many companies are expecting workers to return to the office, but this limits employees flexibility?

Strategy Highlight 11.2 Sony vs. Apple: Whatever Happened to Sony?

Click here for a summary of the Strategy Highlight historically comparing Sony and Apple.

INSTRUCTOR SUPPLEMENT SLIDE 6: SONY VS. APPLE: WHATEVER HAPPENED TO SONY?

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Strategic Management, 6e Teacher‘s Resource Manual STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 19 This slide has a link to a fourteen-minute video discussing Sony from the 1960‘s forward and is a good complement to the Strategy Highlight.

DISCUSSION TOPICS Additionally, MiniCase 11: Chick-fil-A‘s Structure, Culture, and Control is a good fit for discussion of another company that struggled with organizational issues. MiniCase 11 has assignable case questions. There is also a CONNECT® exercise available that instructors can assign for each MiniCase in the text.

After the sale of Yahoo, Ms. Mayer founded a company called ―Lumi Labs‖ that is working on new mobile applications integrating artificial intelligence to save time and effort for mundane activities. A link to a short Fast Company article is here. If this new firm is successful and grows into a larger organization, what ideas from this chapter should Ms. Mayer and the leadership team implement to drive innovation throughout the firm?

INTEGRATION Case Analysis: Kroger—Organized for Innovation This case analysis helps students understand and analyze how structure, strategy, and culture support an organization‘s activities and success. 

Difficulty: Medium

 Blooms: Analyze

11.4 ORGANIZATIONAL CULTURE: VALUES, NORMS, AND ARTIFACTS LO 11-7 Describe the elements of organizational culture, and explain where organizational cultures can come from and how they can be changed.

LECTURE SLIDES 29–32 Organizational culture describes the collectively shared values and norms of an organization‘s members.

Employees learn the culture through socialization. An example is Zappos‘s orientation program to socialize employees to its culture.

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Strategic Management, 6e Teacher‘s Resource Manual DISCUSSION TOPICS Several short videos by Professor Michael Beer can be found at the link. These videos describe how high-commitment, high-performance companies are created, sustained, or destroyed.

INTEGRATION Case Analysis: Chick-fil-A Lives Its Values This case analysis shows students the importance of organizational culture, values, and norms. The goal of this exercise is to recognize organizational culture and values and how they impact firm performance.  

Difficulty: Medium Blooms: Analyze

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 18 This 4-minute video illustrates values, beliefs, and artifacts as elements of Apple‘s culture.

DISCUSSION TOPICS Corporate culture is coming into sharper view across industries and countries as we enter the 2020‘s.

Firms are finding new tensions between candor and sensitivity. One example is Netflix which calls its culture the ―Netflix way‖ as founder and still CEO Reed Hastings encourages direct exchange of ideas in the interest of making a better product and service and pushing everyone to improve. According to comparative surveys, Netflix has among the ―happiest‖ employees and ranks highly on its employee retention rate as well. Yet several executives have been fired over culturally sensitive concerns (See, ―At Netflix, Radical Transparency and Blunt Firings Unsettle the Ranks,‖ WSJ).

Starbucks has faced many challenges. After weathering the COVID-19 pandemic, Starbucks faces the reality that multiple stores are attempting to unionize. Why is this surprising (or is it not surprising)?

Starbucks has been recently in the spotlight given their efforts to prevent unionization. What does new CEO Laxman Narasimhan need to do in order to successfully lead the coffee giant? This six-minute audio clip features a discussion of what Narasimhan will need to do in order to understand his company‘s culture, operations, and coffee.

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TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for information on an extended discussion about the culture of winning at all costs in sports.

DISCUSSION TOPICS One of the greatest challenges of large-scale mergers is the integration of the two firms‘ cultures. You may want to have the students revisit some of the mergers your class discussed in chapter 9 or some of the cultural differences of firms across countries from chapter 10 through this lens of organizational culture. Merger integration issues can develop with multiple and mismatched IT systems but often bigger issues are cultural and decision making differences which may be harder to discover in the due diligence period.

11.5 STRATEGIC CONTROL-AND-REWARD SYSTEMS LO 11-8 Compare and contrast different strategic control-and-reward systems.

LECTURE SLIDES 33–35 Strategic control-and-reward systems are internal governance mechanisms put in place to align the incentives of principals and agents. The control-and-rewards system is a critical part of a successful implementation process. ―What gets measured gets done‖ is a common sentiment in business management. Properly thinking through what to measure, and how to measure it is a vital and often overlooked element of implementation.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 13 These two video links (Part 1 and Part 2) show interviews with past GE CEOs on talent reviews. They illustrate the shift over time in company reward systems and, as a result, culture.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 15 This animated lecture video will connect your strategy course back to the students‘ earlier organizational behavior class. It focuses on motivation.

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TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for questions about the possible consequences of short-term financial focus.

The textbook mentions OKRs (Objectives and Key Results) which are used at organizations like Google. A two-minute video further describing OKRs can be found here and may be a good complement to bring into the classroom for this discussion.

Other types of output controls, like the ROWE system discussed in the text, can be difficult to control ―shirking‖ employees who are not pulling their fair share of the workload. As the Daniel Pink video at RSA Animate demonstrates though, firms need to give more attention to intrinsic motivators that unleash unparalleled creativity and enthusiasm for getting the job done.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 16 In this TED talk, Daniel Pink discusses his theory of motivation. It would be a great introduction to this exercise, but its 18-minute length suggests that assigning it for viewing before class may be more practical.

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity building from the ROWE theory applied to your university.

11.6 IMPLICATIONS FOR STRATEGIC LEADERS INSTRUCTOR SUPPLEMENT SLIDE 8 DISCUSSION TOPIC Jeff Bezos, founder and CEO of Amazon, acquired The Washington Post in 2013. What changes to organization structure, culture, and control systems might be necessary to support a strategy for a newspaper in the digital age? For a perspective at the time of the sale see WSJ‘s article ―Jeff Bezos‘s Tool Kit for the Post.‖ For some thoughts on the results see CNN‘s article and video from summer of 2019, ―How the Washington Post has changed under Jeff Bezos.‖ In addition to the article students can draw on their knowledge of Amazon, and their ideas on the future of journalism. Another important acquisition for Amazon was Whole Foods – what similarities and differences can be found in these two 17 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual acquisitions? How has Jeff Bezos and Amazon influenced the structure, culture, and control systems in these two businesses?

CLASS EXERCISE Assume your group is brought into a business unit, and your analysis shows a significant excess headcount in the accounting and purchasing departments. Your team is now responsible for developing a plan to lay off 25 percent of the employees in those departments. You have six months to identify who to lay off and to reduce the headcount. (If you have no personal experience with workforce reductions, use an Internet search engine and look up ―successful layoffs‖ for some guidance.) How can you downsize the departments without hurting the morale of the remaining workers? What steps do you take to treat with dignity those employees forced to leave?

Make sure there is strong leadership and frequent communication with (and education of) the employees so the concept and message will be delivered clearly. One tendency is for senior leadership to hide or ―circle the wagons‖ during times of layoff. This sends a very poor signal to those remaining workers. As tough as it is, managers must be especially visible and walking the halls to look their employees in the eye and be honest with them about their future and the future of the organization. Even if that future is uncertain. Well-designed benefit packages, courteous communication from top management, and using a face-to-face approach are essential. As one knows, firing people is usually a tough job for any manager.

It needs to be handled personally by a manager and not handed off to some outsider.

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity on the organizational options for a new small business in the retailing industry.

INTEGRATION Comprehension Case: ChapterCase—―A‖ is for Alphabet and ―G‖ is for Google Here, we provide both Parts 1 and 2 of this case, accompanied by short-answer questions that students can complete and submit. Due to the nature of these open-ended questions, they require manual grading. 

Difficulty: Medium  Blooms: Apply

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Strategy Highlights Strategy Highlight 11.1 Zappos: Of Holacracy and (Not Much) Happiness CEO Tony Hsieh developed the online shoe and clothing store, Zappos, based on a core value of making customers happy, which drives success by ―delivering WOW through service.‖ Hsieh compiled this philosophy into a NYT bestseller—Delivering Happiness. Prior to publication, Zappos achieved $1 billion in annual sales in 2008 (a decade after the startup was founded) and the 2009 acquisition by Amazon for $1.2 billion. The unique culture of Zappos has prompted Amazon to maintain a hands-off policy on the operations of Zappos and has even caused Amazon to adopt some Hsieh‘s unique policies, e.g., weeding out cultural misfits by paying employees to leave after the orientation program. In 2013, Hsieh announced the reorganization of the company into a holacracy. This is a structure in which the organization in managed by horizontal, overlapping ―circles‖ of employees. While, in theory, such a structure should/could deliver additional productivity per employee, the realization of actual benefits is more challenging. From 2011 to 2015, Zappos fell from 6th to 86th place on Fortune‟s list of best companies to work for. Since 2016, Zappos has not placed in the top 100. Between 2015 and 2016, 18 percent of Zappos employees have accepted severance packages to leave the company. Employees who have remained with Zappos have expressed a number of concerns with the organizational structure.

Strategy Highlight 11.2 Sony vs. Apple: Whatever Happened to Sony?

In 2001, Apple‘s market capitalization was $7 billion while Sony‘s was $55 billion. This highlight explores the different paths and results associated with these two key players in the portable music industry. This is an industry that was created by Sony in 1979 by the introduction of the Walkman. Sony sought to differentiate itself through vertical integration with the 1988 acquisition of CBS Records and the 1989 acquisition of Columbia Pictures. With this foundation, Sony seemed poised to maintain its leadership in mobile music—capturing both content and delivery. Sony focused on closed innovation with hard alliances (acquisitions) of content. In addition, the content portion of Sony sought to protect its existing revenue stream of CD sales with advances aimed at reducing/eliminating the unauthorized duplications of content. Conversely, Apple employed an open innovation approach and in 2001, just a few months after the creation of a small team, introduced the iPod. This product development combined with the iTunes content distribution to take command of the mobile music industry. The revenue engine of iTunes was to capture a portion of the fee for the distribution of each song or CD downloaded rather than attempt to capture the entire fee for the content. This strategy has allowed Apple to extend the platform delivery portion through the iPhone, iPad and Apple Watch. Apple is now valued at more than $1 trillion while Sony has grown to a mere $65 billion.

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my Strategy Here, we encourage the student to take they have learned about competitive advantage and apply it to his/her own career. Encourage students to spend a few minutes looking at their ideas about future trends and how it may impact their career options.

1.

Review Exhibit 11.11 and circle the organizational characteristics you find appealing.

Cross out those factors you think you would not like.

Some of our students who are looking for the ―what to do after graduation‖ have found this exercise to be a useful way to think about what they are good at and what they would probably want to stay away from as far as a future career. An industry approach can help identify longer range trends and also lesser known firms that might be good candidates for employment. They may want/need to further explore the tradeoffs which define their personal “value innovation.”

2.

Have you been in school or work situations in which your values did not align with those of your peers or colleagues? How did you handle the situation? Are there certain values or norms important enough for you to consider as you look for a new job?

There must be some values and norms that the students hold dear. The values and norms may be from different cultural or international backgrounds. Ask the students how to deal with the cultural conflicts.

Did they make compromises? On what grounds? Why or why not make compromises?

3.

As you consider your career after graduation, which control-and-reward system would you find most motivating? Is this different from the controls used at some jobs you have had in the past? How do you think you would perform in a holacracy such as Zappos?

The students may prefer input, output, or a balanced control and reward system. When they discuss their experience and preferences, encourage them to use theory to explain why they find one more motivating than another.

Discussion Questions 1. Why is it important for an organization to have alignment between its strategy and structure?

This question is a good opportunity for students to reconnect strategy and structure to the strategic management process. It‘s not enough to just create a strategy – the strategy must be implemented.

Structure is crucial for successful implementation. Usually structure follows strategy. This is because strategy is dynamic in nature, and so the structure needs to reflect this dynamism. Structure provides stability and flexibility, which are of utmost importance when a firm is trying to implement strategies.

Structure provides stability for strategy implementation in terms of division of labor, communication channels, and resource allocation. Structure provides flexibility for implementation in terms of real-time problem solving, learning capability, and a better chance to adapt to external environmental forces successfully.

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Strategic Management, 6e Teacher‘s Resource Manual 2. The chapter describes the role of culture in the successful implementation of strategy.

Consider an employment experience of your own or of someone you have observed closely (e.g., a family member). Describe to the best of your ability the values, norms, and artifacts of the organization. What was the socialization process of embedding the culture? Do you consider this to be an example of an effective culture for contributing to the organization‘s competitive advantage? Why or why not?

If used as a classroom exercise, a good approach might be to use the culture of the student body in your business school. Ask students how they learned the student culture at their school. You may even want to breakdown culture between departments or program areas within the college. Orientation programs might be a good example of the socialization process to embed the culture for new students. At the W.P. Carey School of Business at Arizona State University, this is done with undergraduates through Camp Carey. Students may also talk about the Greek system, student organizations, honor codes, and other methods for socializing new entrants to the organization‘s artifacts, norms, and values. In terms of competitive advantage, ask students to what extent the student culture at the university influenced their decision to attend your school. Sports and sport teams are also excellent examples to be used to respond to this question. Finally, connect culture back to the discussion of resources and capabilities to respond to the competitive advantage question. Culture is an important resource/capability that builds over time (path dependent), and it‘s valuable, rare, difficult to imitate, and organized to capture value.

3.

What makes some strong cultures helpful in gaining and sustaining a competitive advantage, while other strong cultures are a liability to achieving that goal?

As discussed in Chapter 2 leadership is one of the most important factors. If the company‘s top management team has integrity and cares for the company as much as the customers, it should be able to provide a clear guideline as to what to do and what not to do. Failure to change cultures to adapt to the changing environment is another factor. Recently, we‘ve experienced a paradigm shift from productoriented operations to market-oriented operations. Again, this question provides and opportunity to link back to Chapter 4 to discuss VRIO and path dependence. Additionally, a great example can be found in NUMMI (the JV between GM and Toyota). Toyota exposed its inner workings to GM in their partnership. Toyota could do that because they understood that the embedded nature (and culture) protected them from imitation.

TRM Extra: Ethical/Social Questions Cultural norms and values play a significant role in all organizations, from businesses in the economic sector to religious, political, and sports organizations. Strong organizational cultures can have many benefits, such as those described in the Zappos example. However, sometimes a strong organizational culture is less positive. Vince Lombardi, renowned coach of the Green Bay Packers, is often quoted as saying, ―Winning isn‘t everything; it‘s the only thing.‖ Many sports teams from junior sports to professional sports have either explicitly or implicitly touted this attitude as exemplary. Others, however, argue that this attitude is what‘s wrong with sports and leads to injury, minor misbehavior, and criminal behavior. It encourages players to do whatever it takes to win—from tripping a player or other unsportsmanlike conduct during middle-school sports to throwing a game as part of gambling. Name 21 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual other examples of organizational culture leading to business failure, criminal behavior, or civil legal actions.

1. When a player hears the message as ―any action will be tolerated as long as you are winning,‖ there can be serious consequences on and off the field. How could leaders of sports organizations communicate the will to win and develop the necessary skills while maintaining ethical behavior? Think of examples of coaches who coaxed players to play by the rules and maintain high personal ethical standards. What other socialization experiences could a coach use? What is the role of team leaders in encouraging high ethical standards while building the desire to win?

Students will have many examples of coaches as leaders. Some interesting contrasts between wellknown coaches might be Bobby Knight and Mike Krzyzewski (Coach K) who trained under Bobby Knight. An example of methods by which leaders communicate high ethical standards might be the ―Coach K Teaching Character Through Sports‖ award. In addition to the focus on the leader‘s role in sports ethics, you might also move the discussion into the player‘s role in creating and maintaining an ethical culture. Here you could discuss how player‘s unions have worked to either cover-up ethical lapse or unsportsmanlike actions or to self-police their profession. You could also talk about the role of informal leaders. Craig Biggio and Ted Williams are baseball players who acted as positive role models in their teams. Lance Armstrong‘s doping scandal is another great example of winning at any cost. GM‘s strong culture combined with its bureaucratic structure made it a liability to the company and caused it to fail recently. Enron‘s culture and control was performance-driven and output-oriented. This lead to one of the biggest financial scandals in U.S. history. Fannie Mae suffered from its subprime mortgage approvals, which helped cause the financial market crash.

2.

As noted in Chapter 5, many public firms are under intense pressure for short-term (such as quarterly) financial improvements. How might such pressure, in combination with output controls, lead to unethical behaviors?

Output control is performance/outcome-oriented, and most of the time, one evaluates performance by using financial analysis. This may create pressures to ―cook the books‖ or inappropriately report items (or NOT report items) in the financials. When a company is short-sighted solely for short-term financial improvements, problems will emerge. For instance, Bernie Madoff began the Ponzi scheme, the Enron scandal occurred, and so on. We should NOT use financials as the only measure of performance.

Students may not be familiar with these scandals and how they develop over time. Often, one small decision to act unethically can lead to a snowball effect. Here are some suggestions/recommendations for supplementary materials that are helpful – these materials will likely need to be assigned as homework due to their length.

You‘re Wrong About: Enron (this podcast episode does a great job of explaining the entire scandal – some cursing in episode) You‘re Wrong About: The Exxon Valdez Oil Spill (another great episode – some cursing in episode) The Golden Age of White Collar Crime (longform article by Michael Hobbes who is also one of the hosts of You‘re Wrong About) 22 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual Bad Blood: Secrets and Lies in a Silicon Valley Startup (fantastic book by John Carreyrou on Theranos)

TRM Extra: Small Group Activity 1. The chapter describes ROWE theory of motivation, in which Daniel Pink argues that the most powerful motivation occurs when there is an interest in the work and the work itself has meaning.

Intrinsic motivation is highest when an employee has autonomy (about what to do), mastery (how to do it), and purpose (why to do it). Assume your group has been asked by your university to brainstorm ways that the university might apply the ROWE theory. Discuss whether you would be more motivated and better educated if you had more autonomy in designing your program of study, could determine the best way for you to learn and gain mastery, and could develop your own statement of purpose as to why you were pursuing a particular program of study.

Students are likely to be passionate about this topic, but opinions are likely to vary. Some students will be more confident than others in believing that they know more about curriculum development than their university‘s faculty and administrators. Some students have strong interests and may feel that the rigidity of defined programs of study prevent them from taking the interdisciplinary varied balance of courses in which they are most interested.

1a.

How might this change the university‘s allocation of resources (e.g., would more trained advisors and career counselors be required, and how would they be evaluated)?

If students are choosing their own course of study and are unlimited in their choices, then fewer advisors might be needed, but the demand for career counseling might increase as students struggle with how to match the topics they choose to study with employer expectations. Students are likely to want outcomebased rewards for career counselors based on student employment success.

1b.

If large numbers of students decided they would learn some of the core materials best by taking an online course, how might this affect the university‘s revenue stream? How might this change the way professors teach courses?

The discussion here will vary based on how much experience the students have with online courses.

Those that have taken several courses will probably bring up how different the experience is from the classroom and how different teaching methods are required to keep it interesting. Professors might be evaluated on student engagement levels in online courses.

1c.

Have each group member explain how this approach might change his/her program of study.

They might also move from business to how the approach might have a different impact in humanities studies versus lab sciences versus fields with professional certifications, such as medicine or accounting.

1d.

Consider the potential pitfalls of such an approach and how these might be addressed.

Students are likely to identify problems related to employment opportunities. Faculty might want to offer insights on the impact on accreditation for the institution, such as AACSB. 23 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual 2. Your classmates are a group of friends who have decided to open a small retail shop. The team is torn between two storefront ideas. The first idea is to open a high-end antique store selling household items used for decorations in upscale homes. Members of the team have found a location in a heavy pedestrian area near a local coffee shop. The store would have many items authenticated by a team member‘s uncle, who is a certified appraiser. In discussing the plan, however, two group members suggest shifting to a drop-off store for online auctions such as Amazon Marketplace or eBay. In this business model, customers drop off items they want to sell, and the retail store does all the logistics involved—listing and selling the items on eBay, and then shipping them to buyers—for a percentage of the sales price.

They suggest that a quick way to get started is to become a franchisee for a group such as ―I Sold It.‖ 2a.

What is the business strategy for each store concept?

One is a retail store and the other one is an online storefront with a middle-man approach.

2b.

How would the organizational structure be different for the two concepts?

The direct retail store could use a simple structure and the other one could use a functional structure with the emphasis on online retailing (e-tailing).

2c.

What would likely be the cultural differences in the two store concepts?

The retail store deals with customers face-to-face, so courteous and friendly service is needed. The culture for online retailing might need to focus more on prompt responses to customers.

2d.

How would the control-and-reward systems be different?

The control and reward system for the retail store will be both input- and output-oriented, while the online store will be output-oriented.

Related MiniCase Instructors may want to consider assigning and discussing the following MiniCase that covers topics found in this chapter. All MiniCases have assignable McGraw Hill Connect® case questions available.

MiniCase 11: Chick-fil-A‘s Structure, Culture, and Control

CHAPTER 12 Corporate Governance, Business Ethics, and Business Models Teacher Resource Chapter Contents

Teacher’s Resource Manual (TRM): Implementation Guide 24

ii

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Strategic Management, 6e Teacher‘s Resource Manual Learning Objectives

1

Textbook Chapter Contents

2

Chapter Teaching Resources

3

Overview of Chapter

5

Classroom Outline

7

Strategy Highlights

16

myStrategy

17

Discussion Questions

18

TRM Extra: Social/Ethical Questions

19

TRM Extra: Small Group Activities

20

Related MiniCase

21

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Strategic Management, 6e Teacher‘s Resource Manual

Teacher’s Resource Manual: Implementation Guide This Teacher‘s Resource Manual (TRM), supports delivery of your chosen curriculum and pedagogy.

This manual contains more than just guidance on how to cover concepts discussed in the sixth edition of Strategic Management; it also provides tips and best practices for how to utilize the full product suite (from the textbook to SmartBook® to Connect®). In addition, this manual includes a variety of supplemental teaching resources to enhance your ability to create an engaging learning experience for your students. Regardless of whether you teach in face-to-face traditional classrooms, blended (flipped) classrooms, online environments, or hybrid formats, you‘ll find everything you need in this improved resource.

The TRM follows the order of the textbook outline for each chapter and is divided into sections for each learning objective. Each section identifies the relevant PowerPoint slides from both the Lecture slides and the Supplemental Lecture slides (more on this below). This eases your preparation time for class as you can adjust slides as needed to ensure your students stay actively engaged throughout each session.

WHAT INSTRUCTOR RESOURCES ARE AVAILABLE? Within each section of the TRM you will find an assortment of examples, exercises, Connect® assignments, updates on the latest research, Strategy Smart Video discussions, and discussion questions and exercises from which you can choose to enhance your students‘ learning and engagement.

Within the Connect® Library, you will find the following: In the Test Builder tab, you can create tests from the Test Bank that can be printed or administered within your LMS. In the Instructor Resources, you can access all of the following items:         

Teacher‘s Resource Manual PowerPoints (Accessible) Application-Based Activities‘ accompanying Teaching Notes Create™ Case Support MiniCase Support Sample Syllabi Video Library Capsim‘s Capstone Simulation and Capsim IM Image Bank (for your customized PowerPoints)

78) This Teacher‘s Resource Manual is posted by chapter.

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Strategic Management, 6e Teacher‘s Resource Manual 79) Two sets of ADA-accessible PowerPoints are available with each chapter: a. Lecture slides cover chapter concepts and exhibits. b. Supplemental Lecture slides cover: i. ii. iii. iv.

Chapter Cases Strategy Highlights Implications for Strategic Leaders Strategy Smart Video selections (not part of the book, but an additional resource found here) v. Key Terms

80) Test Bank questions, found in the Library tab entitled Test Builder, are posted by chapter. You will find a variety of question types within the test bank such as Matching, Ranking, Multiple Choice, Select-All-That-Apply, True/False, Short Answer, and Essays to test student mastery across Bloom‘s Taxonomy (i.e. Understand, Apply, and Analyze).

81) Create™ Case Support (all cases are available in Create™ and selected ones in HBP) a. A case matrix that identifies the industry sector covered by each case, as well as the primary and secondary chapter alignments b. One-page case abstract for quick overview of each case c. Case Teaching Notes for instructor use only d. Case Financials in Excel files for the exhibit data in the most popular cases e. Case Strategic Financial Analysis template f. Instructions on How to Download SEC Financial Data into Excel Spreadsheets 82) MiniCase Support (all MiniCases are located in Part Four of the book) a. MiniCase Teaching Notes comprising suggested answers to the MiniCase discussion questions. In some instances, they also provide specific additional article and video resources to accompany each MiniCase.

83) Video Resources, located in the Video Library, provide links to supplemental video resources to accompany both the MiniCases and full-length Create™ cases, as well as links to all of the assignable videos in Connect®.

84) A link to Capsim’s Capstone Simulation and a Capsim Instructor’s Manual correlated to Strategic Management is provided; this simulation allows students to apply their knowledge of key strategy concepts.

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Strategic Management, 6e Teacher‘s Resource Manual

HOW CAN SMARTBOOK® ENHANCE MY STUDENTS’ PERFORMANCE? SmartBook® is assignable through Connect®, McGraw Hill‘s online assignment and assessment system.

One of the first fully adaptive and individualized study tools designed for students, it creates a personalized learning experience, giving students the opportunity to practice and challenge their understanding of core strategy concepts. The reporting tools within SmartBook® show where students are struggling to understand specific concepts.

Typically, SmartBook® is assigned by module (chapter), and instructors can set which learning objectives to cover as well as the number of probes the student will see for each assignment. Instructors also set the number of points a SmartBook® module is worth in the course. Usually, applying a minimal number of points for completion of each module is enough to encourage students to read the chapter.

Many instructors assign these modules to be completed before the class or online session.

SmartBook® provides several diagnostic tools for instructors to gauge which concepts their students struggle to understand. Below is the set of adaptive assignment reports available in SmartBook®:      

Progress Overview: View student progress broken down by module.

Student Details: View student progress details plus completion level breakdown for each module.

Module Details: View information on how your class performed on each section of their assigned modules.

Practice Quiz: This gives you a quick overview of your students‘ quizzes results.

Missed Questions Metacognitive Skills

By selecting ―Module Details‖ the instructor finds the results for the students in the class overall. These details reveal where in the chapters students might be struggling. The module gives the chapter section, average time spent, average questions per student correct/total, and the percentage of correctness (number of assigned items). Information about the most challenging sections for students can help instructors refine the focus of the next classroom or online session.

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Strategic Management, 6e Teacher‘s Resource Manual For more detailed analysis, SmartBook® captures students‘ confidence in their competency using the ―Metacognitive Skills‖ report. Below (a recreation of the Metacognitive Skills report), we find the second student is confident and mostly correct (91% in the correct & aware column) while the first student ―doesn‘t know what they don‘t know‖ (39% in the far-right column).

STUDENT

Student 1 Student 2 Student 3 Student 4 Student 5 Student 6 Student 7 Student 8 Student 9 Student 10

CORRECT and AWARE 61% 91% 81% 83% 76% 66% 77% 91% 93% 70%

CORRECT and UNAWARE 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

INCORRECT INCORRECT and AWARE and UNAWARE 0% 39% 3% 5% 0% 19% 0% 17% 3% 21% 9% 25% 3% 20% 2% 7% 2% 5% 6% 25%

APPLICATION EXERCISES, QUIZZES, AND TEST BANK What resources are available at the book level?

Connect® offers a wealth of content for both students and instructors. Application Exercises require students to apply key concepts to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor. Before getting into chapter-level assignments, let‘s look at the book-level assignments available.

Four exercises are available for instructors to assign beyond the chapter materials. These are 1) MiniCase Case Analyses, 2) Case Exercises, 3) Financial Ratio Reviews, and 4) MyStrategy exercises.

The Financial Ratio Reviews and MyStrategy exercises comprise our new Student Primer in Connect.

45) To encourage analytical thinking, each MiniCase from Part Four of the book is also an assignable application exercise (MiniCase Case Analysis). Each MiniCase is followed by four to five multiple-choice questions that assess students‘ understanding of the key issues presented in the MiniCase.

46) Case Exercises focus on the key symptoms and influences of a problem a firm might be facing, followed by a series of questions that help students understand how the firm eventually achieves a solution to that problem (or asks students to suggest a solution).

29 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual 47) Financial Ratio Reviews give students the opportunity to further hone their financial analysis skills; review exercises cover each type of financial ratio (activity, leverage, liquidity, market and profitability).

48) MyStrategy exercises for each chapter provide direct personal applications of strategy concepts to careers and lives to help students internalize the content.

What resources are available for each chapter and how should I integrate them in my course?

Consider assigning one or two Application Exercises per chapter. They are built around chapter learning objectives, so the instructor can choose based on their focus for each specific chapter. Several types of application exercises are available in each chapter. The newest additions are our Animated Videos, comprising three- to four-minute videos on key concepts or concepts that tend to challenge students the most. Each animation is accompanied by three to four multiple-choice questions to check student attention and comprehension. Comprehensive Case Analyses and our new On-Location Video Cases feature firms and industries different than those discussed in the textbook and provide relevant, topical information for students. Finally, Click-and-Drag exercises help students actively demonstrate their understanding of the associated learning objectives. Application Exercises can be assigned as preparatory exercises due before class (this is especially good for flipped classrooms), or after class as concept comprehension checks. Applications Exercises will generally be assigned as homework or practice as part of the overall class grade. A general rule of thumb would be to make application exercises worth 5 to 10 points each since these require time and thought.

To find the Applications in Connect®, go to ―Add Assignment‖ and then select ―Question Bank.‖ Application Exercises are organized by chapter. Instructors have the option to select for one attempt only, but they may want to give students unlimited or multiple attempts on the first few assignments to give students a chance to learn and navigate the system. (As the course progresses, instructors may want to tighten up the time on task and reduce the number of attempts to complete each exercise).

Chapter quizzes and full chapter test banks are available for assignment, and like the Application Exercises, are organized by chapter. The value applied to each question should be relatively low because numerous questions are usually assigned for each chapter. As such, make these questions worth 1 or 2 points each. The feedback given to students is time-flexible. Selecting feedback to be displayed after the assignment due date helps to keep students from giving the correct answers to other students while the questions are still available. For this reason, it is suggested that no feedback to quizzes and test bank exams be made available until after the assignment is due.

When should I assign these digital components?

To fully utilize the power of the digital components, instructors will often assign the SmartBook® reading and adaptive learning probes before class meets. Application Exercises can be completed either before or after class; if they are completed before class, they can sometimes serve as good springboards for class discussions. The chapter quiz makes a good check on comprehension of the material and may work best if assigned after each class period. The test bank serves as a good resource for building midterm or final exams.

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Strategic Management, 6e Teacher‘s Resource Manual More detailed information on SmartBook® and Connect® is available through several resources at McGraw Hill. A good starting point is your local Learning Technology Representative, who can be found here: http://www.mheducation.com/highered/platforms/connect/features-educators.html

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Strategic Management, 6e Teacher‘s Resource Manual

COURSE PREPARATION Helpful Suggestions Regarding Assignment Policies: Connect® gives instructors a wide array of flexibility in making assignments and creating grading policies. Instructors may choose to: 

assign as many assignments as appropriate given the level and time commitment expected for the class,



determine point values for each question/application that works within the total course percentages,



make available multiple attempts per assignment with options of accepting the highest score or averaging all the attempts together (several attempts are particularly good for homework assignments),



deduct points for late assignment submissions (percentage deduction per hour/day/week/etc.) or create hard deadlines thus accepting no late submissions,



show feedback on application/questions immediately upon submission or at the time the assignment is due for the whole class, create new assignments or questions from scratch, or edited versions from a variety of provided resources.

Throughout the TRM for each chapter, we will integrate materials from the Lecture PowerPoint slides, Supplemental Lecture slides, Connect® Application Exercises, and MiniCases. This integration of resources will allow for a cohesive presentation of the relevant resources at your disposal, helping you to convey these topics effectively and efficiently to your students.

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Strategic Management, 6e Teacher‘s Resource Manual

CHAPTER 12 Learning Objectives 12-1

Explain the role of corporate governance.

12-2

Apply agency theory to explain why and how companies use governance mechanisms to align the interests of principals and agents.

12-3

Evaluate the board of directors as the central governance mechanism for public stock companies.

12-4

Evaluate other governance mechanisms.

12-5

Explain the relationship between strategy and business ethics.

12-6

Use the business model framework to put strategy into action.

12-7

Explain the long-tail concept and how it can be used as a business model innovation to implement strategy.

This chapter discusses the importance of corporate governance, business ethics, and business models.

First, the chapter explains the role of corporate governance and how it is used to direct and control an enterprise to ensure that it pursues its strategic goals successfully and legally. Then, a discussion of the key factors of governance structures, such as agency theory, board of directors, and other governance mechanisms, is presented. The next section addresses the role of business ethics in strategy implementation. An important implication for students to derive from the chapter is that governance and ethics are closely intertwined in an intersection of setting the right values and then ensuring compliance.

Finally, the business model framework is introduced to put strategy into action. Finally, the long-tail concept and how it can be used as a business model innovation to implement strategy concludes the chapter.

A chapter opening case on Theranos and two strategy highlights are included in the chapter for tangible applications of the theoretical frameworks discussed.

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Strategic Management, 6e Teacher‘s Resource Manual

Text Chapter Contents Chapter Case 12: Theranos: Bad Blood 12.1 Corporate Governance (LO 12-1, LO 12-2, LO 12-3, LO 12-4) CONNECT® INTEGRATION Matching/Multiple Choice: Corporate Governance CONNECT® INTEGRATION Whiteboard Video: Agency Theory CONNECT® INTEGRATION Case Analysis: Luckin Coffee—China’s Enron?

12.2 Strategy and Business Ethics (LO 12-5) Strategy Highlight 12.1: VW’s Dieselgate: School of Hard NOx CONNECT® INTEGRATION Multiple Choice: The Relationship between Strategy and Ethics 12.3 Business Models: Strategy in Action (LO 12-6, LO 12-7) Strategy Highlight 12.2: Business Model Innovation: How Dollar Shave Club Disrupted Gillette CONNECT® INTEGRATION Matching: Business Model Framework (Part 1) CONNECT® INTEGRATION Multiple Choice: Business Model Framework (Part 2) 12.4 Implications for Strategic Leaders ChapterCase 12 / Part II CONNECT® INTEGRATION Comprehension Case: Theranos: Bad Blood

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Strategic Management, 6e Teacher‘s Resource Manual

Chapter Teaching Resources SECTION CHAPTERCASE 12

Title

RESOURCE TYPE

Theranos: Bad Blood

12.1: Corporate Governance

Corporate Governance

Article and Video (2 mins)

Corporate Governance

Connect® Matching/Multiple Choice Exercise

Corporate Governance Comes of Age

Online Video (7 mins)

Ethical/Social Issues: CEO Pay

TRM Extra

Agency Theory

Connect® Video

Whiteboard

Luckin Coffee—China‘s Enron?

Connect® Case Analysis

12.2: Strategy and Business Ethics

VW Executives Charged with Misleading Shareholders Over Diesel Emissions Dieselgate Has Brought VW Benefits Too Small Group Exercise: MBA Oath Ethical/Social Issues: Accounting Dept issues The Relationship Between Strategy and Ethics

WSJ Article

WSJ Article

TRM Extra TRM Extra Connect® Multiple Choice Exercises

12.3: Business Models: Strategy in Action

The Explainer: What is a Business Model? ―In Search of a Printer You Won‘t Want to Destroy‖

HBR Video (2 mins) WSJ article & video

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Strategic Management, 6e Teacher‘s Resource Manual ―Disney+, Apple TV+: How to

Watch TV in this confusing age‖

WSJ article

Business Model Framework (Parts 1 & 2)

Connect® Matching/Multiple Choice Exercises

MiniCase 12: Purdue Pharma and the Opioid Addiction Crisis

Rothaermel Textbook

Theranos: Bad Blood

Connect® Comprehension Case

12.4: Implications for Strategic Leaders

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Strategic Management, 6e Teacher‘s Resource Manual

Overview of the Chapter 12.1

Corporate Governance Corporate Governance concerns the mechanisms to direct and control an enterprise. One of the key issues to understand is the ―Principal-Agent‖ problem illustrated in Exhibit 12.1.

Governance mechanisms such as design of work tasks, and employment contracts are used to align the incentives between principals and agents. They need to be designed to overcome two specific agency problems: adverse selection and moral hazard. Adverse selection occurs when information asymmetry increases the likelihood of selecting an inferior alternative—an example be the case where a potential exaggerates skills and experience. Moral hazard also occurs because of information asymmetry but results in an agent taking undue risks or shirking responsibilities when the costs accrue to another party. An example would be the bailout resulting from the crisis in subprime mortgages.

The key component for creating governance lies with the board of directors. The board comprises inside directors, employees of the firm; and outside directors, either executives of other firms or professionals. The functions of the board include: selecting, evaluating and compensating the CEO; providing guidance to the CEO on these activities for other senior executives; monitoring and advising on strategic initiatives; reviewing and approving audited financial statements; and ensuring the firm‘s compliance with laws and regulations. The board of directors has a fiduciary responsibility to protect the interests of the principals (shareholders) of the firm.

12.2

Strategy and Business Ethics A large-scale failure of governance to avoid a moral hazard can be found in VW‘s Dieselgate which is discussed in Strategy Highlight 12.1. The field of business ethics seeks to create a control mechanism through an agreed-upon code of conduct in business based on societal norms.

While principles, norms and standards different among cultures, beliefs about fairness, honesty and reciprocity are universal norms. Laws and ethics are not synonymous. A law defines the minimum acceptable standard. Organizations that seek to exceed the minimum define an explicit code of conduct. Ethics is the application of the code of conduct to specific situations. Ethical breaches can be divided into bad apples and bad barrels. In the first case, negative events can be traced to limited number of ―rogue‖ actors ignoring the tenets of ethical decision making. The latter case involves a ―toxic‖ corporate culture that supports ethical lapses on a regular or pervasive basis.

12.3

Business Models: Strategy in Action In order to put the goal-directed actions that comprise a firm‘s strategy into practice, it is necessary to define the why, what, who, and how of a business model framework. Exhibit 12.3 visualizes the interplay of these questions to create value. Strategy Highlight 12.2 tells the story of how Dollar Shave Club disrupted established brand Gillette. This section describes a number of popular business models, e.g., Razor/Razor-blades, Freemium, and Bundling among others.

Finally, we explore the dynamic nature of business models. Examples include combination, 5

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Strategic Management, 6e Teacher‘s Resource Manual evolution, disruption, response to disruption, and legal conflicts. The section concludes with a discussion of the Pareto principle and its application to the long-tail concept.

12.4

Implications for Strategic Leaders The strategic leader must recognize that effective corporate governance and solid business ethics are critical to sustaining competitive advantage over time. Beyond creating and monitoring effective governance mechanisms complemented by a strong code of conduct, the effective strategic leader must teach by example—showing employees how to ―walk the talk.‖ Strategic leaders need to live organization core values by example. The ChapterCase explores the governance and ethical failings of Theranos.

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Strategic Management, 6e Teacher‘s Resource Manual

Classroom Outline ChapterCase 12 Theranos: Bad Blood In 2003, a 19-year-old, Stanford engineering student named Elizabeth Holmes founded the medical diagnostic company, Theranos. The basis of the company was the invention of a ―mini-lab‖ that was reportedly capable of conducting 200 lab tests on a single drop of blood collected by a painless finger prick. Holmes‘s strategic intent was that this technology would allow faster, cheaper, more reliable, and convenient blood tests. She theorized that by placing devices in easily accessed locations (e.g. chain pharmacies) and vastly increasing the frequency of tests (once every two weeks), the resulting dynamic view of a person‘s health would result in earlier detection and prevention of disease. At the time, the market for blood testing was ruled by the duopoly of Quest Diagnostics and LabCorp—combining for an 80 percent market share utilizing the traditional technology of multi-vial blood pulls being sent from the doctor‘s office to a regional lab site.

Holmes combined this invention/theory with a high degree of personal charisma. This charisma convinced her college advisor, Channing Robertson (Senior Associate Dean) to join the company.

Robertson‘s endorsement brought the attention of noted VC Tim Draper. These key endorsements supplemented by a media blitz, including Forbes, Fortune, and MSNBC, resulted in investment by not just VC firms but also such billionaires Rupert Murdoch and the Walton family. By 2014, Theranos was valued at $10 billion with half of that being held by Holmes.

The shining story began to unravel in 2013 when Theranos entered an agreement with Walgreens that provided testing for that pharmacy‘s Arizona based customers. The original plan was to place the ―Edison‖ mini-lab in the Walgreens location. However, the Edison machine is defined as a ―medical device‖ requiring FDA approval – which the start-up had not obtained. As a work-around, the pin prick samples were sent to Theranos headquarters for testing. The next problem came when the new device failed to produce results for the scope of tests advertised. Theranos was forced to revert to traditional testing devices, but due to the small sample collected, the results produced were substandard.

INSTRUCTOR SUPPLEMENT SLIDE 3

ChapterCase 12 Part II As Holmes was guiding the Theranos startup, she was impressed by the personal ―aura‖ around Steve Jobs and seemingly sought to recreate his ―personal reality field‖ in which objective facts are ignored in favour of the idealized promotion of the founder. Shortly after founding Theranos, Holmes, armed with her former advisor, Charles Roberston, and co-opted VC, Tim Draper, sought to recruit a hand-picked board of directors that included George Schultz, Henry Kissenger, James Mathis, and William Perry.

These ―elder statesmen‖ were not recruited because of their ability to provide strategic guidance, rather 7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual Holmes was looking for a board that had the ―star power‖ to intimidate government regulators to accept Theranos‘s assertions without supporting data. The shining unicorn began to unravel during the field test with Walgreens. The results posted did not match results from an individual who had recent tests run by Qwest or LabCorp. The situation deteriorated when a whistle-blower complaint was presented to government regulators and the Wall Street Journal published a series of articles in Fall of 2015 describing the ―fraud‖ of Theranos. The final bombshell landed in 2018 when federal prosecutors delivered indictments against Holmes and her second-in-command, Ramesh ―Sonny‖ Balwani for fraud.

In 2022, a jury trial resulted in convictions on multiple counts of wire fraud and one count of conspiracy to commite wire fraud by lying to investors. She faces up to 20 years in prison plus millions in restitution and fines.

ChapterCase 12 Discussion Questions 1. What was the original mission and vision of Theranos founder Elizabeth Holmes? How did Holmes set out to fulfill her mission?

Holmes combined the invention of a ―mini-lab‖—supposedly capable of performing 200 tests on a single drop of blood—with the theory that cheaper, less invasive, more convenient could create an environment where by a higher frequency of testing would result in a ―dynamic health portrait‖ that would result in early detection and prevention of disease. She used her charisma to attract counselors and investors that added to well-orchestrated media hype. Everything went right until Theranos attempted a field trial with Walgreens clients in Arizona.

2. What is the designated role of a board of directors? Did the Theranos board of directors fulfill this role? Why, or why not? If not, what was the motivation behind stacking the board the way Holmes did? Explain.

The Board of Directors has a fiduciary responsibility to protect the shareholders of a company. This translates into the mechanisms of corporate governance and ―advice and counsel‖ to the executives of a corporation regarding strategic initiatives. The fact that the initial ―trial‖ of Theranos‘s process could not be executed (local installation of the Edison ―mini-lab‖ would have required an FDA certification as a medical device) demonstrates a significant failure of the board‘s charter. Upon examination, Holmes was not looking for an ―engaged‖ board; she was seeking to hand pick a board with the ―star power‖ to intimidate regulators to accept Theranos‘s assertions without proof.

3. Theranos was valued at some $10 billion at its peak. Did the investors overlook any red flags? Or was it simply FOMO (―fear of missing out‖) that made them hurry to jump on the Theranos bandwagon? Why were so many people caught up in the hype around Theranos and Elizabeth Holmes, its charismatic leader?

The peak valuation is tied to 2014—Theranos started its trial with Walgreens in 2013. Any savvy investor should have recognized that the business plan of installing the Edison ―mini-lab‖ in pharmacy locations required a ―medical device‖ certification from the FDA. Not only did no such certifications exist, there was no active process to achieve certification. Lacking what would seem to be reasonable 8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual due diligence, we must assume the enrapture of the investment community of the Elizabeth Holmes bandwagon.

4. Why and how did Theranos get in trouble?

This is a classic case of a ―wonderful‖ theory that collides with reality. Despite the hoopla of a disruptive technology that would revolutionize blood testing, there was no data prior to the start of the Walgreens trial that supported the Theranos theory. If the ability to conduct 200 lab tests on a single drop of blood was valid, this premise would have been proven or [more likely] disproven during the trials required for certification of Edison as a medical device. Theranos attempted to ―finesse‖ the issue by sending lab test to headquarters and ultimately using traditional testing methodologies. Despite the attempts to divert critical analysis, the house of cards tumbled with fraud charges leveled against Holms and Balwani in 2018.

5. What lessons can be learned from the Theranos case?

We have here a case in which a disruptive technology is presented against an established marketplace (a duopoly controlling 80% of the blood testing market). The disruptive concept is exciting and is promoted by a charismatic leader. Influential advisors are co-opted, leading to influential investors. The media hype continues the run up to a $10 billion valuation. Why did nobody demand certification of results against the current ―gold standard‖? Once an actual field trial began, the purported results quickly unraveled. Bottom line for new ventures: ―trust but verify.‖

12.1 CORPORATE GOVERNANCE LO 12-1 Explain the role of corporate governance.

LECTURE SLIDES 3–4 In this section, we review the ideas behind agency theory as illustrated in Exhibit 12.1. It is the theoretical backbone of corporate governance, which illustrates the so-called ―principal–agent‖ problems and relationships.

Corporate Governance Outside the United States: The role of corporate governance varies from country to country. When competing around the world, managers need to be mindful of the differences in corporate governance in the countries in which they do business. Many international companies have stumbled by not managing corporate-governance relationships appropriately within the given institutional context.

EXAMPLES GERMANY. Given national differences, corporate governance also differs around the world. The EU‘s largest economy, Germany, has since World War II developed stakeholder capitalism. In this model of governance, workers‘ representatives typically occupy half the seats on a company‘s board of directors (supervisory board). Companies are required to act on behalf of all stakeholders, and not just those owning shares in the firm. Shareholder activism is quite restrained in Germany compared with the United States or Britain, and German investors have more limited power. As a result, the tensions 9 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual between shareholder value creation and employee concerns are lower in German firms. Another reason for less tension between shareholders and management is that the largest German firms are often debtfinanced rather than equity-financed. This difference puts banks, rather than shareholders, at the center of German corporate governance. Relying on debt-financing allows German managers and employees to take a longer-term perspective. In the recent prolonged recession, German firms generally focused more on maintaining a high level of employment than on cutting costs by laying off workers. Many German firms instituted Kurzarbeit—voluntary reduction of work hours by employees, to keep them on the payroll—subsidized by the federal government. This contrast can be seen in the results of a survey that asked corporate managers which is more important—saving jobs or paying dividends. In Germany, 60 percent said jobs. In the United States and Britain, 90 percent said dividends.

FRANCE. France, Europe‘s second-largest economy in the EU, also uses a stakeholder-capitalist system. France has perhaps even more direct government involvement in company ownership and in determining strategic directions of state-owned companies. For example, the French government threatened both carmaker Renault and nuclear-energy company Areva with a loss of subsidies if they shifted manufacturing jobs and operations outside France. The French government is directly involved in important strategic decisions at the company level.

CHINA. China, now the second-largest economy worldwide in nominal GDP (behind the United States and before Japan), uses state-directed capitalism to organize economic activity. China began implementing economic reforms in the 1980s. Its move toward a more market-oriented system has accelerated since 2001, when it joined the World Trade Organization (WTO), an international body that aims to liberalize and supervise global trade. In China, the most significant businesses are state-owned enterprises (SOEs), in which the state is the majority or sole owner. Given this ownership structure, social goals such as high levels of employment and provision of benefits (e.g., housing, health care, and so on) are seen as equally important or more important than profitability. On the downside, principal– agent problems are rampant in SOEs: Managers have no incentive to run the enterprises effectively.

Nonetheless, China is putting the institutional entities in place to foster a free-market capitalist system.

LO 12-2 Apply agency theory to explain why and how companies use governance mechanisms to align interests of principals and agents.

Lecture Slides 4–6

This brief section covers the important topics of key elements of agency theory such as adverse selection and moral hazard. Even though students have had these concepts in prior economic courses we find a short review is useful as they are sometimes still confused between the difference of these topics.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 17 This under two-minute video provides an overview of corporate governance goals and methods.

LO 12-3 Evaluate the board of directors as the central governance mechanism for public stock companies.

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Strategic Management, 6e Teacher‘s Resource Manual Lecture Slides 7–8

The board of directors serves the primary function of providing general strategic oversight and guidance.

Additionally, they can aid in additional activities including selecting, evaluating, and compensating the CEO, overseeing the CEO succession plan, providing additional guidance when hiring other executives, reviewing, monitoring, evaluating, and approving any significant strategic initiatives and corporate actions, conducting risk assessments and risk mitigation, and ensuring compliance.

INTEGRATION Matching/Multiple Choice: Corporate Governance This exercise starts with a brief case furthering the principal–agent discussion from the text. The student must read the textbook and also the case provided here. Then, the student will answer questions about issues related to corporate governance.

Follow-Up Activity: The instructor can expand on the concepts from this interactive by discussing the second discussion question in the end of chapter materials. The separation of CEO and chairman of the board continues to be a vital topic, particularly at large companies like HP, but also at many others. Ask the students to research some large firms to see which ones have one person as both CEO and chair of the board of directors. How long has this arrangement been in place at these firms? 

Difficulty: Medium

 Blooms: Analyze

INTEGRATION Whiteboard Video: Agency Theory Agency theory describes how problems may arise when the people who own something (the principals) are different than the people who manage that thing (the agents). Firms, particularly publicly traded firms, must manage these problems through a variety of mechanisms. 

Difficulty: Medium

 Blooms: Analyze

INTEGRATION Case Analysis: Luckin Coffee—China‘s Enron?

This case analysis covers the oversight of the board of directors and how it performs a critical function in publicly traded companies. The goal of this exercise is to examine the impact of how well the board performs its functions relative to company actions.

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Strategic Management, 6e Teacher‘s Resource Manual 

Difficulty: Medium  Blooms: Analyze

LO 12-4 Evaluate other governance mechanisms.

STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 15 LECTURE SLIDES 9–12 This lecture by INSEAD Prof. Van der Heyden expresses a European viewpoint on U.S. CEO compensation and provides theoretical support based on value creation and rent appropriation perspectives.

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for some thoughts on CEO pay.

12.2 STRATEGY AND BUSINESS ETHICS LO 12-5 Explain the relationship between strategy and business ethics.

LECTURE SLIDES 13–16 STRATEGY SMART VIDEO LECTURE INSTRUCTOR SUPPLEMENT SLIDE 14 This 10-minute video describes the culture and leadership problems that led to Tyco‘s corruption problems and how the new management team used corporate governance to restore ethical behavior.

EXAMPLES Volkswagen installed software on its automobiles that overrode emissions controls allowing the vehicles to emit much higher levels of NOX than were registered when the cars were approved for sale by the EPA (see ―Volkswagen Emissions Scandal Relates to 11 Million Cars,‖ The Wall Street Journal, September 22, 2015). Several years later the ramifications of ―DieselGate‖ still impact the firm. See for example this fall 2019 article ―VW Executives Charged With Misleading Shareholders Over Diesel Emissions,‖ WSJ. Though the firm has been fined over $30B, VW has also been successful at using this crisis to bring about major changes and a renewed push for cultural and product changes (such as electric vehicles) that may put the firm in a good position for the turbulent decade ahead in the global automotive industry. (See, ―Dieselgate Has Brought VW Benefits Too,‖ WSJ).

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Strategic Management, 6e Teacher‘s Resource Manual Bribery of government officials to get them to permit business growth is not solely a problem of emerging markets. United Continental CEO Smisek and two other executives left the firm due to allegations of bribery involving the NJ Port Authority and access to gates at Newark airport (see ―United Continental CEO Jeff Smisek Departs Amid Continuing Investigation,‖ WSJ).

Strategy Highlight 12.1 VW’s Dieselgate: School of Hard NOx Click here for a summary of the Strategy Highlight covering the scandal of VW intentionally providing false readings on U.S. emissions tests.

There is a great episode of Netflix‘s Dirty Money series that covers the VW scandal that would be a fantastic supplement.

INSTRUCTOR SUPPLEMENT SLIDE 6: VW’S DIESELGATE: SCHOOL OF HARD NOX

TEACHER RESOURCE EXTRA: SMALL GROUP EXERCISE Click here for a suggested small group activity regarding the MBA oath (Exhibit 12.4).

TEACHER RESOURCE EXTRA: Ethical/Social Issues Click here for some ethically challenging ideas for the accounting department.

INTEGRATION Multiple Choice: The Relationship Between Strategy and Ethics This exercise will provide students with an understanding of how unethical behavior can significantly impact organizational performance and longevity. 

Difficulty: Medium

 Blooms: Analyze

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Strategic Management, 6e Teacher‘s Resource Manual

12.3 BUSINESS MODELS: STRATEGY IN ACTION LO 12-6 Use the business model framework to put strategy into action.

Instructor Slides 16–20 A business model stipulates how the firm conducts its business with its buyers, suppliers, and partners.

A business model explains how the firm intends to make money. Exhibit 12.3 showcases the business model framework and how the process of formulating and implementing a business model is connect to the important questions of why, what, who, and how.

The chapter includes a detailed application of the framework to the case of Microsoft.

EXAMPLES Razor-razor blades: The initial product is often sold a ta loss or given away to drive demand for complementary goods. Example: HP printers and ink/toner cartridges Subscriptions: Users pay for access to a product or service regardless if they use the product or service during the payment term. Example: Microsoft Office 365 application software Pay-as-you-go: Users pay for only the services they consume. Example: power or water service; cell phone service plans Freemium: The basic features of a product or service is provided free of charge, but it charges the user for premium services such as advanced features or add-ons. Example: Spotify, Wall Street Journal Ultra-low cost: A basic service is provided at a low cost and extra items are sold at a premium.

Example: Spirit Airlines Wholesale: The traditional model in retail, suppliers provide a good at a fixed price, and retailers set their own price and profit from the difference. Example: book publishers Agency: The producer relies on an agent or retailer to sell the product, at a predetermined percentage commission. Example: sports agents, online sales Bundling: Products and service for which demand is negatively correlated are sold at a discount.

Example: Microsoft Office Suite includes multiple software applications (some are used more frequently than others, but you can‟t buy the applications separately).

Business models are dynamic and must respond to disruption and legal conflicts.

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Strategic Management, 6e Teacher‘s Resource Manual

INTEGRATION Matching and Multiple Choice: Business Model Framework, Parts 1 and 2 These exercises help students to understand the importance of choosing the right business model. The goal of these activities is to understand the dynamic nature of business models and the different business model frameworks that can be adapted to gain a competitive advantage.

LO 12-6 Explain the long-tail concept and how it can be used as a business model innovation to implement strategy.

The long-tail concept is a business model innovation in which companies can obtain a large(r) part of their revenues by selling a small number of units from among almost unlimited choices. Leveraging the long tail allows firms to overcome the problem of think markets in the physical world, in which transactions are unlikely to take place because there are only a few buyers and a few sellers and they have difficulty finding each other. Threadless is used as an example.

12.4 IMPLICATIONS FOR STRATEGIC LEADERS Additionally, MiniCase 12: Purdue Pharma and the Opioid Addiction Crisis is a good fit for topics covered in this section as the short case covers the ethical issues confronted by Purdue Pharma, as well as the FDA, and doctors. There are also CONNECT® exercises available that instructors can assign for each MiniCase in the text. code, Astroturf, and 3-D ultrasound.

INTEGRATION Comprehension Case: ChapterCase—Theranos: Bad Blood Here, we provide both Parts 1 and 2 of this case, accompanied by short-answer questions that students can complete and submit. Due to the nature of these open-ended questions, they require manual grading. 

Difficulty: Medium  Blooms: Apply

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Strategic Management, 6e Teacher‘s Resource Manual

Strategy Highlight 12.1 VW’s Dieselgate: School of Hard NOx VW used to have the reputation as one of the most reliable car manufacturers in the world. From the counter-culture of the VW ―bug‖ in the late 50‘s to the 70‘s, VW held a significant presence in the U.S. auto marketplace. However, VW failed to evolve. In 1993, VW‘s sales had fallen to 38,000 vehicles and was facing bankruptcy. Enter Ferdinand Piech, who led the smaller ―luxury‖ unit of Audi but was also a grandson of Porsche. Through a series of manipulations, VW averted a takeover by Porsche and reversed the thrust whereby VW was the dominant owner of Porsche and Audi. Elevated to the corporate pinnacle, Piech installed his protégé from Audi, Winterkorn as CEO of VW. Winterkorn believed that his charter was to implement Piech‘s ―grand schemes,‖ one of which was a smaller, highly efficient diesel developed for Audi. Once implanted in VW, looked to spread the concept of the ―TDI‖ engineer through the VW pasture.

The concept of the small diesel had trade-offs against emissions. This was not an issue until George Bush in 2007 and Barack Obama in 2009 certified significant increases in auto emission standards. From the passage of the standards, it was obvious that the TDI engine could not pass the new standards.

A complicated/directed farce was initiated to ―mask‖ the actual TDI results. What occurred was a blatant approach to cheating emissions tests—the VW engines in question recognized that they were being tested and responded with a ―cheating protocol.‖ There is a critical question of “bad apples” vs ”bad barrels.” Had engineers and executives pointed the finger at each other?

Strategy Highlight 12.2 Business Model Innovation: How Dollar Shave Club Disrupted Gillette Innovations do not need to be high-tech or radical to be successful. Gillette once dominated the safety razor and the razor-razor blade business model. However, they were disrupted by a startup with an initial budget of $8,000. Gillette‘s process of incremental innovation led to the creation of a too expensive product that was over-engineered. Their dominance in safety razors over many years and their incremental innovation exposed them to low-cost disruption. Gillette‘s newest razors had six blades, a swiveling ball hinge, and a price tag of over $11.00 per unit. Dollar Shave Club established a low-cost alternative. A hilarious promotional video that went viral launched the success of an ecommerce startup that delivers razors by mail. In 48 hours, 12,000 people signed up for the service. The company was also able to raise funding from venture capital firms. The success of Dollar Shave Club has opened the door from new competition such as Unilever. As a result of new business models, Gillette‘s market share has gone from 75% of the market to 50%.

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my Strategy INSTRUCTOR SUPPLEMENT SLIDE 10: ARE YOU PART OF GEN Z, OR WILL YOU MANAGE GEN-Z WORKERS? Here, we encourage the student to take what they have learned about competitive advantage and apply it to his/her own career. Encourage students to spend a few minutes looking at themselves to discover their own competitive advantages.

Generation Z (born between 1997 and 2012) is just starting to enter the college-aged work force and beginning their careers now, as the Baby Boomers (born between 1946 and 1964) retire in large numbers, and Millennials (1981–1996) and Gen X (1965–1980) workers reach leadership roles. About 67 million people make up Gen Z (compared to 72 million Millennials). This generation is also the most racially diverse in U.S. history. Nearly half of Gen Zers are non-Caucasian, including 24 percent Hispanic. Gen Zers have been described as the most well-educated, well-behaved generation in several cycles. However, they are also the highest stressed and depressed generation—perhaps ever in the United States.

The financial crisis of 2008, September 11th attacks, and ongoing global and societal conflicts seem to have scarred this generation more than any since their great-great grandparents, who survived the Great Depression of the 1930s and World War II. This seems to have instilled a desire for personal financial stability and a more cautious approach to life than the prior three generations. For example, many Gen Zers are delaying driver‘s licenses and using their finely honed smartphone skills to navigate with ride hailing services, e-scooters, and public transit, rather than driving a personal car. The early trends are that this generation may shy away from starting their own firms (due to the financial uncertainty of such new ventures). Gen Z also desires the flexible schedules of ―gig jobs‖ even in more traditional work settings. Classic beginning jobs in retailing and hospitality are having trouble finding young workers to fill traditional work shifts used to cover the store or restaurant hours, for example. Additionally, this generation is comfortable trusting adults, and many large firms are creating small work groups so that older workers can assist with broadly needed training and mentoring. Firms such as EY are now using video technology in the recruiting and interview process to attract more Gen Z workers. Intuit has added all its job openings on the internal Slack messaging system so current employees, who may not follow their emails closely, will not miss out on new job opportunities within the firm. Intuit hopes to improve retention rates with such methods.

1.

As this cohort expands in the work force, do you expect to see different sets of business ethics and workplace culture take hold? Please explain.

While it is early to know, early indications are that Gen Z will raise awareness to social and environmental issues. This in combination with retiring boomers who are perhaps considering how to leave the world a healthy place for their grandchildren has the potential to be a cultural sea change in the workplace. Gen Z employees in several U.S and European firms are actively engaging their employers to do more for climate change, sexual harassment issues, and economic disparity. All of these are challenging the role of the firm as a profit maximizer for the stockholders versus a more holistic stakeholder view of the firm.

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Strategic Management, 6e Teacher‘s Resource Manual 2.

Are efforts such as the MBA oath (discussed in this chapter) reflections of a different approach that Gen Z will bring to the business environment, compared with prior generations?

The MBA oath would seem to be a mechanism for garnering common support among future business leaders for a more ethical and less self-centered way to approach leadership and business. On the other hand, it could be an idealistic approach that falters in the crucible of tough career and business decisions as the thousands of MBA students who have signed it move out into the prime of their professions.

Discussion Questions 1. The shared value creation framework provides help in making connections between economic and societal needs in a way that transforms a business opportunity. Taking the role of a consultant to Uber (ride-hailing service), discuss how Uber might move into fields serving more of a societal need. Provide some suggestions or concrete actions the firm can take that would connect its economic and social needs.

Uber has at times reduced rates in times of local disasters which is laudable. The firm could do more to help potential drivers who could earn income to pull themselves out of low-income situations but who cannot afford a capable car to use for driving in the ride hailing service. Some car lending arrangement for example of cars coming off the rental car use, could be used to provided vital income for low-income individuals and also help a driver shortage for the ride hailing services. Longer term Uber could have incentives for drivers to use hybrid and electric cars for a lower carbon footprint of the service. A service such as Uber Eats could be used to deliver day old food to urban homeless shelters to reduce food spoilage and provide healthy food to those who really need it.

2. How can a top management team lower the chances that key managers will pursue their own self-interests at the expense of stockholders? At the expense of the employees? At the expense of other key stakeholders?

An appropriate corporate governance mechanism must be in place to monitor key managers‘ behaviors.

Further, a company may use internal and external auditors or control procedures to prevent the managers from inappropriate actions. The board of directors can monitor the managers‘ practices but also balance out the power and authority that a manager has. A firm may establish a well thought out code of conduct for both management and employees to follow.

3. The Business Roundtable has recommended that the CEO should not also serve as the chairman of the board. Discuss the disadvantages for building a sustainable competitive advantage if the two positions are held by one person. What are the disadvantages for stakeholder management? Are there situations where it would be advantageous to have one person in both positions?

The functions of the two roles are different. A board of directors broadly oversees a company‘s business activities. The company‘s chief executive officer (CEO) reports to the board of directors and acts as a liaison between the company and the board. The CEO has high-level responsibilities over all the management activities of a company while the functions of the board of directors include approving the annual budget and dealing with stakeholders. Moreover, a CEO is the public face of a 18 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual company or organization and takes the hit or pat on the back if a company fails or succeeds, while the board of directors is there to steer a company in the right direction. The benefit of a combined CEO and chair of the board is that they can act in unity to streamline the decision-making process and strategy implementation. More firms are splitting the top jobs in response to shareholder demands for greater independent oversight of CEOs by boards.

TRM Extra: Ethical/Social Questions 1. As noted in the chapter, the average compensation for a CEO of an S&P 500 company was $12.4 million, and CEO pay was 300 times the average worker pay. This contrasts with historic values of between 25 and 40 times the average pay. Trying to highlight this disparity the U.S. Securities and Exchange Commission (SEC) approved a rule in 2015 mandating that U.S. firms publicly disclose the gap between their CEO annual compensation and the median pay of the firm‘s other employees. Thus far there is little evidence the rule has made an impact. What are the potentially negative effects of this increasing disparity in CEO pay? Do you believe that current executive pay packages are justified? Why or why not?

The majority of compensation for CEOs comes from stock options, which allows the CEO to purchase shares in company stock at a set price that can be significantly lower than market value. The ability to buy stock at a lower price and sell when stock prices are higher may motivate the CEO to find ways to exaggerate the value of company shares. This temptation can motivate CEOs to direct subordinates to report false profit statements and undertake unethical accounting methods, creating a false impression of corporate profitability. When the CEO pay is 300 times the average worker pay, it presents an unfair situation to the entire society. It does NOT seem justified, but would take coordination across shareholders and boards to reverse the trend. CEO positions are subject to the same supply and demand conditions of major sports figures and actors, where it is viewed to be a position not many people can successfully perform, so the salaries go up chasing the talent deemed to be ready for the post. Thus an argument that it is market based and will at some point ―market correct‖ is common.

2.

Assume you work in the accounting department of a large software company. Toward the end of December, your supervisor tells you to change the dates on several executive stock option grants from March 15 to July 30. Why would your supervisor ask for this change? What should you do?

This seems that the supervisor is demanding illegal and unethical tax evasive actions. Unless there is some legitimate error in the stock option dating, the employee has every right to refuse to make these changes because of the liability issues. Further, if this request is condoned in the organization, it may be time to quit the job or contact the IRS to report the issue.

TRM Extra: Small Group Activities 1) Uber is a highly valued ―unicorn,‖ with a disregard for regulations and other external factors that would slow its growth as discussed in this chapter. Other competing firms are taking a somewhat 19 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual different route to the ride-hailing marketplace. For example, Lyft (discussed in ChapterCase 9) was also started in San Francisco, and it has been growing across the country and more slowly internationally.

Lyft started as a ride-sharing service targeting U.S. college students heading home for the holidays. The firm continues to focus on building a trusting community of drivers and riders—a community that is both social and cost-effective. In 2017 Lyft added to a prior partnership with General Motors by allying with Waymo (an Alphabet company). Another Uber competitor is Didi Chuxing, a dominant ridehailing service in China.

In your groups, do internet research about Uber competitors (www.lyft.com and www.didiglobal.com will get you started).

1a.

What similarities and differences do you find in the way these firms have implemented sometimes similar ideas?

Lyft has focused on building its U.S. base before launching aggressively overseas. Didi has also started with a focus on its domestic market (China) and moved globally more slowly. Didi hired female president from Goldman Sachs who has a Harvard master‘s in computer science. Didi also purchased Uber China in 2016. Both Lyft and Didi have major partnerships with other MNCs to help manage their expansions in services and geography.

1b.

Discuss why traditional taxi companies, such as Yellow Cabs and those needing medallions (such as in New York City), are choosing to attempt to prohibit these app-enabled, ride-hailing services rather than aggressively implementing their own app-calling systems.

Traditional taxi companies are licensed and regulated in many areas, but particularly in their fares. This means that they have no ability to do surge pricing. Many cities around the world have mini-cabs or gypsy cabs that are unregulated and work by ride-hailing, although they are usually run ―on the cheap‖ and would be unlikely to develop an app or other infrastructure. Medallion taxi services have a whole industry infrastructure to support that is threatened by this service, such as banks that loan money with medallions as collateral, dispatchers, and repair garages and mechanics.

This article is a great resource on the impact of ride-sharing on the taxi industry.

2) The MBA oath (shown in Exhibit 12.2) says in part, ―My decisions affect the well-being of individuals inside and outside my enterprise, today and tomorrow.‖ One example of a large firm reorienting toward this approach is PepsiCo. In the last few years, PepsiCo has been contracting directly with small farmers in impoverished areas (for example, in Mexico). What started as a pilot project in PepsiCo‘s Sabritas snack food division has now spread to farmers in more than 15 countries providing potatoes, corn, sunflower oil, and other products to the firm. PepsiCo provides a price guarantee to farmers that is higher and much more consistent than the previous system of using intermediaries. The farmers report that since they have a firm market, they are planting more crops. Output is up about 160 percent, and farm incomes have tripled in recent years. The program has benefits for PepsiCo as well. A shift to sunflower oil for its Mexican products will replace the 80,000 tons of palm oil it imports to Mexico from Asia and Africa, thus slashing transportation and storage 20 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Strategic Management, 6e Teacher‘s Resource Manual costs. The firm is expanding the farmer sustainability program with plans to cover about 7 million acres, or 75 percent of its agricultural spending by 2025.

2a.

What are the benefits of this program for PepsiCo? What are its drawbacks?

It lowers the cost in transportation and storage by importing from Mexico instead of Asia, and helps stabilize key suppliers, which aids PepsiCo with the consistency of scheduling and processing. However, if sunflower oil produces a different taste than palm oil, it could have very negative effects on the sales of their products.

2b.

What other societal benefits could such a program have in Mexico?

The benefit is that PepsiCo created a win–win situation for both the company and local farmers by improving the local economies. This means the company takes good care of the stakeholders by doing good.

2c.

If you were a PepsiCo shareholder, would you support this program? Why or why not?

It is an ethical behavior and students should generally answer ―Yes.‖ The answer for ―No‖ can be supported if the student links it to an overall increase in costs or a loss of focus on the desires for products by the end consumer.

Related MiniCase Instructors may want to consider assigning and discussing the following MiniCase, which covers topics found in this chapter. Every MiniCase has assignable McGraw Hill Connect® case questions available.

MiniCase 12: Purdue Pharma and the Opioid Addiction Crisis

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