wk8dq1

gam27636_fm_i-xxxvi.indd i 01/16/18 09:52 PM

6e

John E. Gamble
Texas A&M University–Corpus Christi

Margaret A. Peteraf
Dartmouth College

Arthur A. Thompson, Jr.
The University of Alabama

ESSENTIALS OF

STRATEGIC
MANAGEMENT
The Quest for Competitive Advantage

Final PDF to printer

gam27636_fm_i-xxxvi.indd ii 01/16/18 09:52 PM

ESSENTIALS OF STRATEGIC MANAGEMENT: THE QUEST FOR COMPETITIVE ADVANTAGE,
SIXTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2019 by McGraw-
Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2017, 2015,
and 2013. No part of this publication may be reproduced or distributed in any form or by any means, or stored
in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but
not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the
United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 0 LWI 21 20 19 18

ISBN 978-1-259-92763-8 (bound edition)
MHID 1-259-92763-6 (bound edition)
ISBN 978-1-260-13956-3 (loose-leaf edition)
MHID 1-260-13956-5 (loose-leaf edition)

Portfolio Director: Michael Ablassmeir
Lead Product Developer: Kelly Delso
Product Developer: Anne Ehrenworth
Executive Marketing Manager: Debbie Clare
Content Project Managers: Harvey Yep (Core), Keri Johnson (Assessment)
Buyer: Laura Fuller
Design: Matt Diamond
Content Licensing Specialists: DeAnna Dausener (Image and Text)
Compositor: SPi Global
Cover Image: ©view stock/getty images
Printer: LSC Communications

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Cataloging-in-Publication Data

Names: Gamble, John (John E.) author. | Thompson, Arthur A., 1940- author. |
Peteraf, Margaret Ann, author.
Title: Essentials of strategic management: the quest for competitive advantage/
John E. Gamble, Texas A&M University-Corpus Christi, Margaret A. Peteraf,
Dartmouth College, Arthur A. Thompson, Jr., The University of Alabama.
Description: Sixth Edition. | Dubuque : McGraw-Hill Education, 2019. |
Revised edition of the authors’ Essentials of strategic management, [2017]
Identifiers: LCCN 2017059878 | ISBN 9781259927638 (paperback)
Subjects: LCSH: Strategic planning. | planning. | Competition. |
Strategic planning–Case studies. | BISAC: BUSINESS & ECONOMICS /
Management.
Classification: LCC HD30.28 .G353 2018 | DDC 658.4/012–dc23
LC record available at https://lccn.loc.gov/2017059878

mheducation.com/highfered

Final PDF to printer

gam27636_fm_i-xxxvi.indd iii 01/16/18 09:52 PM

iii

John E. Gamble is a Professor of Management and Dean of the College of at
Texas A&M University–Corpus Christi. His teaching and research has focused on stra-
tegic management at the undergraduate and graduate levels. He has conducted courses
in strategic management in Germany since 2001, which have been sponsored by the
University of Applied Sciences in Worms.

Dr. Gamble’s research has been published in various scholarly journals, and he is the
author or co-author of more than 75 case studies published in an assortment of strategic
management and strategic marketing texts. He has done consulting on industry and
market analysis for clients in a diverse mix of industries.

Professor Gamble received his PhD, Master of Arts, and Bachelor of Science degrees
from the University of Alabama and was a faculty member in the Mitchell College of
at the University of South Alabama before his appointment to the faculty at
Texas A&M University–Corpus Christi.

Margaret A. Peteraf is the Leon E. Williams Professor of Management at the Tuck
School of at Dartmouth College. She is an internationally recognized scholar
of strategic management, with a long list of publications in top management journals.
She has earned myriad honors and prizes for her contributions, including the 1999
Strategic Management Society Best Paper Award recognizing the deep influence of her
work on the field of strategic management. Professor Peteraf is on the Board of Direc-
tors of the Strategic Management Society and has been elected as a Fellow of the Soci-
ety. She served previously as a member of the Academy of Management’s Board of
Governors and as Chair of the Policy and Strategy Division of the Academy.
She has also served in various editorial roles and is presently on nine editorial boards,
including the Strategic Management Journal, the Academy of Management Review, and
Organization Science. She has taught in Executive Education programs around the world
and has won teaching awards at the MBA and Executive level.

Professor Peteraf earned her PhD, MA, and MPhil at Yale University and held previ-
ous faculty appointments at Northwestern University’s Kellogg Graduate School of
Management and at the University of Minnesota’s Carlson School of Management.

ABOUT THE AUTHORS

John E. Gamble
©Richard’s Photography LLC

Margaret A. Peteraf
©Heather Gere

Final PDF to printer

gam27636_fm_i-xxxvi.indd iv 01/16/18 09:52 PM

iv About the Authors

Arthur A. Thompson, Jr. earned his BS and PhD degrees in economics from The
University of Tennessee, spent three years on the economics faculty at Virginia Tech, and
served on the faculty of The University of Alabama’s College of Commerce and
Administration for 25 years. In 1974 and again in 1982, Dr. Thompson spent semester-long
sabbaticals as a visiting scholar at the Harvard School.

His areas of specialization are business strategy, competition and market analysis,
and the economics of business enterprises. In addition to publishing over 30 articles in
some 25 different professional and trade publications, he has authored or co-authored
five textbooks and six computer-based simulation exercises that are used in colleges and
universities worldwide.

Dr. Thompson spends much of his off-campus time giving presentations, putting on
management development programs, working with companies, and helping operate a
business simulation enterprise in which he is a major partner.

Dr. Thompson and his wife of 57 years have two daughters, two grandchildren, and
a Yorkshire terrier.

Arthur A. Thompson, Jr.
Photo provided by the author.

Final PDF to printer

gam27636_fm_i-xxxvi.indd v 01/16/18 09:52 PM

v

BRIEF CONTENTS
PART ONE CONCEPTS AND TECHNIQUES
FOR CRAFTING AND EXECUTING
STRATEGY

Section A: Introduction and Overview

1. Strategy, Models, and Competitive
Advantage 1

2. Strategy Formulation, Execution, and
Governance 13

Section B: Core Concepts and Analytical Tools

3. Evaluating a Company’s External Environment 36
4. Evaluating a Company’s Resources, Capabilities,

and Competitiveness 64

Section C: Crafting a Strategy

5. The Five Generic Competitive Strategies 88
6. Strengthening a Company’s Competitive Position:

Strategic Moves, Timing, and Scope of
Operations 111

7. Strategies for Competing in International
Markets 132

8. Corporate Strategy: Diversification and the
Multibusiness Company 154

9. Ethics, Corporate Social Responsibility,
Environmental Sustainability, and Strategy 182

Section D: Executing the Strategy

10. Superior Strategy Execution—Another Path to
Competitive Advantage 199

Appendix Key Financial Ratios: How to Calculate
Them and What They Mean 231

PART TWO CASES IN CRAFTING AND
EXECUTING STRATEGY

Case 1 Airbnb, Inc., in 2017 233
Case 2 Costco Wholesale in 2017: Mission,

Model, and Strategy 238

Case 3 Competition in the Craft Brewing Industry in
2017 261

Case 4 Fitbit, Inc., in 2017: Can It Revive Its Strategy
and Reverse Mounting Losses? 271

Case 5 lululemon athletica, inc., in 2017: Is the
Company on the Path to Becoming a High
Performer Once Again? 279

Case 6 Gap Inc.: Can It Develop a Strategy to Connect
with Consumers in 2017? 298

Case 7 GoPro in 2017: Will Its Turnaround Strategy
Restore Profitability? 307

Case 8 Ricoh Canada 322
Case 9 Mondelēz International’s Diversification

Strategy in 2017: Has Corporate Restructuring
Benefited Shareholders? 335

Case 10 Robin Hood 346
Case 11 Rosen Hotels & Resorts 348
Case 12 TOMS Shoes in 2016: An Ongoing Dedication

to Social Responsibility 360

Glossary 369

Indexes 373

Final PDF to printer

gam27636_fm_i-xxxvi.indd vi 01/16/18 09:52 PM

vi

PREFACE

The standout features of this sixth edition of Essentials of Strategic Management are its concisely written and robust coverage of strategic management concepts
and its compelling collection of cases. The text presents a conceptually strong treatment
of strategic management principles and analytic approaches that features straight-to-
the-point discussions, timely examples, and a writing style that captures the interest of
students. While this edition retains the 10-chapter structure of the prior edition, every
chapter has been reexamined, refined, and refreshed. New content has been added to
keep the material in line with the latest developments in the theory and practice of
strategic management. Also, scores of new examples have been added, along with fresh
Concepts & Connections illustrations, to make the content come alive and to provide
students with a ringside view of strategy in action. The fundamental character of the
sixth edition of Essentials of Strategic Management is very much in step with the best
academic thinking and contemporary management practice. The chapter content con-
tinues to be solidly mainstream and balanced, mirroring both the penetrating insight of
academic thought and the pragmatism of real-world strategic management.

Complementing the text presentation is a truly appealing lineup of 12 diverse,
timely, and thoughtfully crafted cases. All of the cases are tightly linked to the content
of the 10 chapters, thus pushing students to apply the concepts and analytical tools
they have read about. Seven of the cases were written by the coauthors to illustrate spe-
cific tools of analysis or distinct strategic management theories. Cases not written by
the coauthors were included because of their exceptional pedagogical value and link-
age to strategic management concepts presented in the text. We are confident you will
be impressed with how well each of the 12 cases in the collection will work in the class-
room and the amount of student interest they will spark.

For some years now, growing numbers of strategy instructors at business schools world-
wide have been transitioning from a purely text-cases course structure to a more robust
and energizing text-cases-simulation course structure. Incorporating a competition-based
strategy simulation has the strong appeal of providing class members with an immediate
and engaging opportunity to apply the concepts and analytical tools covered in the chapters
in a head-to-head competition with companies run by other class members. Two widely used
and pedagogically effective online strategy simulations, The Strategy Game and
GLO-BUS, are optional companions for this text. Both simulations, like the cases, are
closely linked to the content of each chapter in the text. The Exercises for Simulation
Participants, found at the end of each chapter, provide clear guidance to class members in
applying the concepts and analytical tools covered in the chapters to the issues and deci-
sions that they have to wrestle with in managing their simulation company.

Through our experiences as business school faculty members, we also fully under-
stand the assessment demands on faculty teaching strategic management and business

Final PDF to printer

gam27636_fm_i-xxxvi.indd vii 01/16/18 09:52 PM

Preface vii

policy courses. In many institutions, capstone courses have emerged as the logical
home for assessing student achievement of program learning objectives. The sixth edition
includes Assurance of Learning Exercises at the end of each chapter that link to the
specific Learning Objectives appearing at the beginning of each chapter and highlighted
throughout the text. An important instructional feature of this edition is the linkage of
selected chapter-end Assurance of Learning Exercises and cases to the publisher’s Connect®
web-based assignment and assessment platform. Your students will be able to use the
online Connect supplement to (1) complete two of the Assurance of Learning Exercises
appearing at the end of each of the 10 chapters, (2) complete chapter-end quizzes,
and (3) complete case tutorials based upon the suggested assignment questions for
all 12 cases in this edition. With the exception of some of the chapter-end Assurance
of Learning exercises, all of the Connect exercises are automatically graded, thereby
enabling you to easily assess the learning that has occurred.

In addition, both of the companion strategy simulations have a built-in Learning
Assurance Report that quantifies how well each member of your class performed on
nine skills/learning measures versus tens of thousands of other students worldwide who
completed the simulation in the past 12 months. We believe the chapter-end Assurance
of Learning Exercises, the all-new online and automatically graded Connect exercises,
and the Learning Assurance Report generated at the conclusion of The Strat-
egy Game and GLO-BUS simulations provide you with easy-to-use, empirical measures
of student learning in your course. All can be used in conjunction with other instructor-
developed or school-developed scoring rubrics and assessment tools to comprehen-
sively evaluate course or program learning outcomes.

Taken together, the various components of the sixth edition package and the sup-
porting set of Instructor Resources provide you with enormous course design flexibility
and a powerful kit of teaching/learning tools. We’ve done our very best to ensure that
the elements comprising this edition will work well for you in the classroom, help you
economize on the time needed to be well prepared for each class, and cause students to
conclude that your course is one of the very best they have ever taken—from the stand-
point of both enjoyment and learning.

Differentiation from Other Texts
Five noteworthy traits strongly differentiate this text and the accompanying instructional
package from others in the field:

1. Our integrated coverage of the two most popular perspectives on strategic management
positioning theory and resource-based theory is unsurpassed by any other leading
strategy text. Principles and concepts from both the positioning perspective and
the resource-based perspective are prominently and comprehensively integrated
into our coverage of crafting both single-business and multibusiness strategies.
By highlighting the relationship between a firm’s resources and capabilities to
the activities it conducts along its value chain, we show explicitly how these
two perspectives relate to one another. Moreover, in Chapters 3 through 8, it is
emphasized repeatedly that a company’s strategy must be matched not only to its
external market circumstances but also to its internal resources and competitive
capabilities.

Final PDF to printer

gam27636_fm_i-xxxvi.indd viii 01/16/18 09:52 PM

viii Preface

2. Our coverage of business ethics, core values, social responsibility, and environmental
sustainability is unsurpassed by any other leading strategy text. Chapter 9, “Ethics,
Corporate Social Responsibility, Environmental Sustainability, and Strategy,” is
embellished with fresh content so that it can better fulfill the important functions of
(1) alerting students to the role and importance of ethical and socially responsible
decision making and (2) addressing the accreditation requirements that business
ethics be visibly and thoroughly embedded in the core curriculum. Moreover,
discussions of the roles of values and ethics are integrated into portions of other
chapters to further reinforce why and how considerations relating to ethics, values,
social responsibility, and sustainability should figure prominently into the manage-
rial task of crafting and executing company strategies.

3. The caliber of the case collection in the sixth edition is truly unrivaled from the stand-
points of student appeal, teachability, and suitability for drilling students in the use
of the concepts and analytical treatments in Chapters 1 through 10. The 12 cases
included in this edition are the very latest, the best, and the most on-target that
we could find. The ample information about the cases in the Instructor’s Manual
makes it effortless to select a set of cases each term that will capture the interest of
students from start to finish.

4. The publisher’s Connect assignment and assessment platform is tightly linked to the
text chapters and case lineup. The Connect package for the sixth edition allows pro-
fessors to assign autograded quizzes and select chapter-end Assurance of Learning
Exercises to assess class members’ understanding of chapter concepts. In addition,
our texts have pioneered the extension of the Connect platform to case analysis.
The autograded case exercises for each of the 12 cases in this edition are robust
and extensive and will better enable students to make meaningful contributions
to class discussions. The autograded Connect case exercises may also be used as
graded assignments in the course.

5. The two cutting-edge and widely used strategy simulations—The Strategy
Game and GLO-BUS—that are optional companions to the sixth edition give you
unmatched capability to employ a text-case-simulation model of course delivery.

Organization, Content, and Features of the Sixth
Edition Text Chapters
The following rundown summarizes the noteworthy features and topical emphasis in
this new edition:

• Chapter 1 serves as an introduction to the topic of strategy, focusing on the manage-
rial actions that will determine why a company matters in the marketplace. We intro-
duce students to the primary approaches to building competitive advantage and
the key elements of business-level strategy. Following Henry Mintzberg’s pioneer-
ing research, we also stress why a company’s strategy is partly planned and partly
reactive and why this strategy tends to evolve. The chapter also discusses why it
is important for a company to have a viable business model that outlines the com-
pany’s customer value proposition and its profit formula. This brief chapter is the

Final PDF to printer

gam27636_fm_i-xxxvi.indd ix 01/16/18 09:52 PM

Preface ix

perfect accompaniment to your opening-day lecture on what the course is all about
and why it matters.

• Chapter 2 delves more deeply into the managerial process of actually crafting and
executing a strategy. It makes a great assignment for the second day of class and pro-
vides a smooth transition into the heart of the course. The focal point of the chapter
is the five-stage managerial process of crafting and executing strategy: (1) forming a
strategic vision of where the company is headed and why, (2) developing strategic
as well as financial objectives with which to measure the company’s progress,
(3) crafting a strategy to achieve these targets and move the company toward its
market destination, (4) implementing and executing the strategy, and (5) evaluating
a company’s situation and performance to identify corrective adjustments that are
needed. Students are introduced to such core concepts as strategic visions, mission
statements and core values, the balanced scorecard, and business-level versus
corporate-level strategies. There’s a robust discussion of why all managers are on a
company’s strategy-making, strategy-executing team and why a company’s strategic
plan is a collection of strategies devised by different managers at different levels
in the organizational hierarchy. The chapter winds up with a section on how to
exercise good corporate governance and examines the conditions that led to recent
high-profile corporate governance failures.

• Chapter 3 sets forth the now-familiar analytical tools and concepts of industry and
competitive analysis and demonstrates the importance of tailoring strategy to fit the
circumstances of a company’s industry and competitive environment. The standout
feature of this chapter is a presentation of Michael Porter’s “five forces model of com-
petition” that has long been the clearest, most straightforward discussion of any text in
the field. Chapter revisions include an improved discussion of the macro-environment,
focusing on the use of the PESTEL analysis framework for assessing the political,
economic, social, technological, environmental, and legal factors in a company’s
macro-environment. New to this edition is a discussion of Michael Porter’s Frame-
work for Competitor Analysis used for assessing a rival’s likely strategic moves.

• Chapter 4 presents the resource-based view of the firm, showing why resource
and capability analysis is such a powerful tool for sizing up a company’s competi-
tive assets. It offers a simple framework for identifying a company’s resources
and capabilities and explains how the VRIN framework can be used to determine
whether they can provide the company with a sustainable competitive advantage
over its competitors. Other topics covered in this chapter include dynamic capa-
bilities, SWOT analysis, value chain analysis, benchmarking, and competitive
strength assessments, thus enabling a solid appraisal of a company’s relative cost
position and customer value proposition vis-à-vis its rivals.

• Chapter 5 deals with the basic approaches used to compete successfully and gain
a competitive advantage over market rivals. This discussion is framed around the
five generic competitive strategies—low-cost leadership, differentiation, best-cost
provider, focused differentiation, and focused low-cost. It describes when each of
these approaches works best and what pitfalls to avoid. It explains the role of cost
drivers and uniqueness drivers in reducing a company’s costs and enhancing its
differentiation, respectively.

Final PDF to printer

gam27636_fm_i-xxxvi.indd x 01/16/18 09:52 PM

x Preface

• Chapter 6 deals with the strategy options available to complement a company’s
competitive approach and maximize the power of its overall strategy. These
include a variety of offensive or defensive competitive moves, and their timing,
such as blue ocean strategy and first-mover advantages and disadvantages. It also
includes choices concerning the breadth of a company’s activities (or its scope of
operations along an industry’s entire value chain), ranging from horizontal merg-
ers and acquisitions, to vertical integration, outsourcing, and strategic alliances.
This material serves to segue into that covered in the next two chapters on interna-
tional and diversification strategies.

• Chapter 7 explores the full range of strategy options for competing in international
markets: export strategies, licensing, franchising, establishing a subsidiary in a for-
eign market, and using strategic alliances and joint ventures to build competitive
strength in foreign markets. There is also a discussion of how to best tailor a com-
pany’s international strategy to cross-country differences in market conditions and
buyer preferences; how to use international operations to improve overall competi-
tiveness; the choice between multidomestic, global, and transnational strategies;
and the unique characteristics of competing in emerging markets.

• Chapter 8 introduces the topic of corporate-level strategy—a topic of concern for
multibusiness companies pursuing diversification. This chapter begins by explaining
why successful diversification strategies must create shareholder value and lays out
the three essential tests that a strategy must pass to achieve this goal (the industry
attractiveness, cost of entry, and better-off tests). Corporate strategy topics covered
in the chapter include methods of entering new businesses, related diversification,
unrelated diversification, combined related and unrelated diversification approaches,
and strategic options for improving the overall performance of an already diversified
company. The chapter’s analytical spotlight is trained on the techniques and pro-
cedures for assessing a diversified company’s business portfolio—the relative attrac-
tiveness of the various businesses the company has diversified into, the company’s
competitive strength in each of its business lines, and the strategic fit and resource fit
among a diversified company’s different businesses. The chapter concludes with
a brief survey of a company’s four main post-diversification strategy alternatives:
(1) sticking closely with the existing business lineup, (2) broadening the diversification
base, (3) divesting some businesses and retrenching to a narrower diversification
base, and (4) restructuring the makeup of the company’s business lineup.

• Although the topic of ethics and values comes up at various points in this text-
book, Chapter 9 brings more direct attention to such issues and may be used as
a standalone assignment in either the early, middle, or late part of a course. It
concerns the themes of ethical standards in business, approaches to ensuring con-
sistent ethical standards for companies with international operations, corporate
social responsibility, and environmental sustainability. The contents of this chapter
are sure to give students some things to ponder, rouse lively discussion, and help
to make students more ethically aware and conscious of why all companies should
conduct their business in a socially responsible and sustainable manner.

• Chapter 10 is anchored around a pragmatic, compelling conceptual framework:
(1) building dynamic capabilities, core competencies, resources, and structure

Final PDF to printer

gam27636_fm_i-xxxvi.indd xi 01/16/18 09:52 PM

Preface xi

necessary for proficient strategy execution; (2) allocating ample resources to
strategy-critical activities; (3) ensuring that policies and procedures facilitate rather
than impede strategy execution; (4) pushing for continuous improvement in how
value chain activities are performed; (5) installing information and operating sys-
tems that enable company personnel to better carry out essential activities; (6) tying
rewards and incentives directly to the achievement of performance targets and good
strategy execution; (7) shaping the work environment and corporate culture to fit
the strategy; and (8) exerting the internal leadership needed to drive execution for-
ward. The recurring theme throughout the chapter is that implementing and exe-
cuting strategy entails figuring out the specific actions, behaviors, and conditions
that are needed for a smooth strategy-supportive operation—the goal here is to
ensure that students understand that the strategy implementing/strategy executing
phase is a make-it-happen-right kind of managerial exercise that leads to operating
excellence and good performance.

In this latest edition, we have put our utmost effort into ensuring that the 10 chapters
are consistent with the latest and best thinking of academics and practitioners in the
field of strategic management and hit the bull’s-eye in topical coverage for senior- and
MBA-level strategy courses. The ultimate test of the text, of course, is the positive peda-
gogical impact it has in the classroom. If this edition sets a more effective stage for your
lectures and does a better job of helping you persuade students that the discipline of
strategy merits their rapt attention, then it will have fulfilled its purpose.

The Case Collection
The 12-case lineup in this edition is flush with interesting companies and valuable les-
sons for students in the art and science of crafting and executing strategy. There is a
good blend of cases from a length perspective—about one-third are under 10 pages yet
offer plenty for students to chew on; about a third are medium-length cases; and the
remaining one-third are detail-rich cases that call for sweeping analysis.

At least 11 of the 12 cases involve companies, products, people, or activities that
students will have heard of, know about from personal experience, or can easily iden-
tify with. The lineup includes at least four cases that will provide students with insight
into the special demands of competing in industry environments where technological
developments are an everyday event, product life cycles are short, and competitive
maneuvering among rivals comes fast and furious. All of the cases involve situations
where the role of company resources and competitive capabilities in the strategy for-
mulation, strategy execution scheme is emphasized. Scattered throughout the lineup
are seven cases concerning non-U.S. companies, globally competitive industries, and/or
cross-cultural situations; these cases, in conjunction …