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Strategic Management: Competitiveness and Globalisation © 2022 Cengage Learning Australia Pty Limited
7th Edition
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1 2 3 4 5 6 7 25 24 23 22 21
 v

BRIEF CONTENTS
PART 1 PART 4
1 STRATEGIC MANAGEMENT INPUTS 1 4 CASE STUDIES 411
1 Strategic management and strategic Introduction: A summary of the case analysis process 412
competitiveness 2
Case 1: JB Hi-Fi Ltd acquisition of The Good Guys 415
2 The external environment: opportunities,
Case 2: Challenges at Australia Post 426
threats, industry competition and competitor
analysis 34 Case 3: Nyrstar NV: a case study in a failed vertical
integration strategy 432
3 The internal organisation: resources, capabilities,
core competencies and competitive advantages 72 Case 4: Pfizer 442
Case 5: Atlassian 454

PART 2 Case 6: The Sunshine Coast UNESCO Biosphere

2 STRATEGIC ACTIONS: STRATEGY FORMULATION 101 Reserve and Smart City: a new governance
opportunity in a post-pandemic world? 458
4 Business-level strategy 102
Case 7: CrossFit at the crossroads 465
5 Competitive dynamics 131
Case 8: The movie exhibition industry: 2018
6 Corporate-level strategy 161 and beyond 482
7 Acquisition and restructuring strategies 189 Case 9: Pacific Drilling: the preferred offshore driller 506
8 International strategy 218 Case 10: The trivago way - growing without
growing up? 522
9 Cooperative strategy 252
Case 11: The Volkswagen emissions scandal 539
Case 12: Otis in the global elevator industry 549
PART 3
3 STRATEGIC ACTIONS: STRATEGY Case 13: Dick Smith: the fall of an Aussie icon 555
IMPLEMENTATION 283
GLOSSARY 566
10 Corporate governance 284
NAME INDEX 572
11 Organisational structure and controls 321 SUBJECT INDEX 580
12 Strategic leadership 355
13 Strategic entrepreneurship 386
vi

CONTENTS
GUIDE TO THE TEXT XII 2 The external environment: opportunities,
GUIDE TO THE ONLINE RESOURCES XIV threats, industry competition and competitor
PREFACE XVI analysis 34
ABOUT THE AUTHORS XVIII Opening case study: Drilling for oil: risks and rewards 35
ACKNOWLEDGEMENTS XXI The general, industry and competitor
environments 38
PART 1
1 STRATEGIC MANAGEMENT INPUTS 1
External environmental analysis
Scanning
39
40
1 Strategic management and strategic Monitoring 40
competitiveness 2 Forecasting 41
Assessing 41
Opening case study: McDonald’s and brand recognition 3
The strategic management process 4 Segments of the general environment 41
The demographic segment 42
The competitive landscape 7 The economic segment 44
The global economy 8 The political/legal segment 46
Strategic focus: Starbucks is a new economy The sociocultural segment 47
multinational yet has had failures in key markets 9 The technological segment 49
The march of globalisation 10 The global segment 50
Technology and technological changes 11 The physical environment segment 51
Strategic focus: Strategic focus: Target (Tar-zhey) is trying to navigate in
The core of Apple: technology and innovation 14 a new and rapidly changing competitive landscape 52
The I/O model of above-average returns 15 Industry environment analysis 53
The resource-based model of above-average Threat of new entrants 54
returns 17 Bargaining power of suppliers 57
Vision and mission 19 Bargaining power of buyers 57
Vision 19 Threat of substitute products 58
Mission 20 Strategic focus: German performance/luxury cars: if
you’ve seen one, have you seen them all? 58
Stakeholders 21 Intensity of rivalry among competitors 59
Classifications of stakeholders 21
Interpreting industry analyses 61
Strategic leaders 23 Strategic groups 61
The work of effective strategic leaders 24
Predicting outcomes of strategic decisions 25 Competitor analysis 62
Ethical dimensions 25 Ethical considerations 64

STUDY TOOLS 27 STUDY TOOLS 65

 CONTENTS vii

3 The internal organisation: resources, capabilities, How: determining core competencies necessary to
core competencies and competitive advantages 72 satisfy customer needs 108

Opening case study: Large pharmaceutical companies, The purpose of a business-level strategy 109
big data analytics, artificial intelligence and core Business models and their relationship with
competencies: a brave new world 73
business-level strategies 109
Analysing the internal organisation 75 Types of business-level strategies 110
The context of internal analysis 75 Cost leadership strategy 112
Creating value 76 Differentiation strategy 115
The challenge of analysing the internal organisation 77 Focus strategies 119
Resources, capabilities and core competencies 79 Integrated cost leadership/differentiation strategy 120
Strategic focus: Tangible and intangible resources as the Strategic focus: Apple vs Samsung vs Huawei: the battle
base for core competencies 80 for smart technology 121
Resources 80
STUDY TOOLS 125
Capabilities 83
Core competencies 83 5 Competitive dynamics 131
Building core competencies 84 Opening case study: Tesco PLC: a case study in
competitive behaviour 132
Strategic focus: Procter & Gamble: using capabilities and
core competencies to create value for customers 85 A model of competitive rivalry 134
The four criteria of sustainable competitive advantage 86 Competitor analysis 135
Value chain analysis 89 Market commonality 136
Competencies, strengths, weaknesses and Strategic focus: Competitive rivalry in fast fashion: a
strategic decisions 92 constant stream of actions and responses 137
Resource similarity 138
STUDY TOOLS 94
Drivers of competitive actions and responses 139
PART 2 Competitive rivalry 141
2 STRATEGIC ACTIONS: STRATEGY FORMULATION 101 Strategic and tactical actions 141

4 Business-level strategy 102 Likelihood of attack 142

First-mover incentives 142
Opening case study: Clonakilla Wines in a quality niche
Organisational size 144
position 103
Quality 144
Customers: their relationship with business-
Likelihood of response 145
level strategies 105
Type of competitive action 146
Effectively managing relationships with
Actor’s reputation 146
customers 105
Dependence on the market 147
Reach, richness and affiliation 106
Who: determining the customers to serve 107 Competitive dynamics 147
What: determining which customer needs Slow-cycle markets 147
to satisfy 107 Fast-cycle markets 148
viii CONTENTS

Strategic focus: The emergence of competitive rivalry 7 Acquisition and restructuring strategies 189
among battery manufacturers: who will establish the
Opening case study: Strategic acquisitions and a people-
most attractive market position? 150
focused integration of those acquisitions are vital
Standard-cycle markets 152 capabilities of Atlassian 190
STUDY TOOLS 153 The popularity of merger and acquisition
6 Corporate-level strategy 161 strategies 192
Mergers, acquisitions and takeovers: what are the
Opening case study: The quintessential diversified
differences? 192
organisation 162
Purpose of corporate-level strategies 163 Reasons for acquisitions 193
Increased market power 193
Levels of diversification 164 Overcoming entry barriers 195
Low levels of diversification 165 Strategic focus: Cross-border acquisitions by
Moderate and high levels of diversification 166 organisations from emerging economies:
Strategic focus: Acciona’s related diversification and leveraging resources to gain a larger global footprint and
renewable energy growth 166 market power 196
Reasons for diversification 167 Cost of new product development and increased speed
to market 198
Value-creating diversification: related constrained
Lower risk compared to developing new products 199
and related linked diversification 169
Increased diversification 199
Operational relatedness: sharing activities 170
Reshaping the organisation’s competitive scope 200
Corporate relatedness: transferring of core
Learning and developing new capabilities 200
competencies 170
Market power 171 Problems in achieving acquisition success 201
Strategic focus: Alphabet’s evolution through Integration difficulties 201
diversification 172 Inadequate evaluation of target 202
Simultaneous operational relatedness and corporate Large or extraordinary debt 203
relatedness 174 Inability to achieve synergy or harvest benefits 203
Unrelated diversification 174 Too much diversification 204
Efficient internal capital market allocation 174 Managers overly focused on acquisitions 205
Restructuring of assets 176 Too large 205

Value-neutral diversification: incentives and Effective acquisitions 206

resources 176 Restructuring 208
Incentives to diversify 177 Downsizing 208
Resources and diversification 178 Downscoping 209
Value-reducing diversification: managerial motives Leveraged buyouts 209
to diversify 179 Restructuring outcomes 209

STUDY TOOLS 182 STUDY TOOLS 211

 CONTENTS ix

8 International strategy 218 Types of major strategic alliances 255

Opening case study: An international strategy powers Strategic focus: Samsung Electric is using diversifying
ABB’s future 219 alliances to reduce its dependence on Google’s Android
operating system 256
Identifying international opportunities 221 Reasons organisations develop strategic alliances 258
Incentives to use international strategy 221
Strategic focus: Industrial clusters: geographic centres
Three basic benefits of international strategy 222 for collaborative partnering 260
International strategy types 224 Competition-reducing strategy 263
International business-level strategy 225
International corporate-level strategy 227
Business-level cooperative strategy 263
Complementary strategic alliances 264
Environmental trends 230 Competition response strategy 266
Liability of foreignness 230 Uncertainty-reducing strategy 266
Regionalisation 231 Assessing business-level cooperative strategies 266
Choice of international entry mode 232 Corporate-level cooperative strategy 267
Exporting 232 Diversifying strategic alliance 267
Licensing 233 Synergistic strategic alliance 268
Strategic alliances 234 Franchising 268
Acquisitions 235 Assessing corporate-level cooperative strategies 269
New wholly owned subsidiaries 236
Dynamics of mode of entry 236
International cooperative strategy 269
Strategic focus: Mondelez International: a global leader in Network cooperative strategy 270
snack foods 237 Alliance network types 271
Risks in an international environment 238 Competitive risks with cooperative strategies 272
Political risks 238 Managing cooperative strategies 273
Economic risks 239
STUDY TOOLS 275
The challenge of international strategies 240
Managing international strategies: size and complexity 240
PART 3
Limits to international expansion
Strategic focus: Mexico’s FEMSA: building its international
241 3 STRATEGIC ACTIONS: STRATEGY
prowess 241 IMPLEMENTATION 283
Strategic competitiveness outcomes 242 10 Corporate governance 284
International diversification and returns 242 Opening case study: General Electric’s complex
Enhanced innovation 243 diversification strategy makes evaluation difficult for
STUDY TOOLS 244 board directors 285

9 Cooperative strategy 252 Separation of ownership and managerial control 288

Agency relationships 288
Opening case study: Global cars, with a twist 253
Product diversification as an example of an
Strategic alliances as a primary type of agency problem 290
cooperative strategy 254 Agency costs and governance mechanisms 291
x CONTENTS

Ownership concentration 292 Matches between corporate-level strategies and the

Ownership structures of companies in Australia 293 multi-divisional structure 332
The increasing influence of institutional owners 293 Strategic focus: Globalisation and beer 333
Strategic focus: General Electric’s decline, new strategy
Board of directors 293
and reorganisation 339
Board of directors process 296
Matches between international strategies and
Enhancing the effectiveness of the board of directors 297
worldwide structure 340
Executive compensation 298
Matches between cooperative strategies and network
The effectiveness of executive compensation 299 structures 344
Strategic focus: Has more governance scrutiny made
large CEO compensation packages more reasonable? 300
Implementing business-level cooperative
strategies 345
Market for corporate control 301
Implementing corporate-level cooperative
International corporate governance 302 strategies 346
Corporate governance in Australia 302
Corporate governance in Germany and Japan 306
Implementing international cooperative
Corporate governance in China 307 strategies 347
Corporate governance in Spain 308 STUDY TOOLS 348
Governance mechanisms and ethical behaviour 308 12 Strategic leadership 355
Strategic focus: Rewarding top executives of one of the Opening case study: Meg Whitman: a pioneering strategic
most poorly governed banks in the world: Westpac 309 leader 356
Corporate governance and organisation performance 311
Corporate social responsibility 311
Strategic leadership and style 358
The role of executive managers 360
STUDY TOOLS 313
Executive management teams 361
11 Organisational structure and controls 321
Managerial succession 363
Opening case study: Changing McDonald’s organisational Strategic focus: Women in leadership 365
structure and controls: a path to improved performance 322
Key strategic leadership actions 366
Organisational structure and controls 323 Determining strategic direction 366
Organisational structure 324
Effectively managing the organisation’s resource
Organisational controls 325 portfolio 368
Relationships between strategy and structure 326 Sustaining an effective organisational culture 370

Evolutionary patterns of strategy and Strategic focus: Organisational culture: is it really that
important? 372
organisational structure 327
Emphasising ethical practices 373
Simple structure 328
Leadership and corporate social responsibility 374
Functional structure 328
Establishing balanced organisational controls 375
Multi-divisional structure 328
Matches between business-level strategies and the STUDY TOOLS 378
functional structure 329
 CONTENTS xi

13 Strategic entrepreneurship 386 PART 4

Opening case study: Today it is gas and diesel: tomorrow 4 CASE STUDIES 411
it is likely to be electric vehicles, plug-in hybrids, and
driverless cars and trucks 387 Introduction: A summary of the case analysis process 412

Entrepreneurship and entrepreneurial Case 1: JB Hi-Fi Ltd acquisition of The Good Guys 415
opportunities 389 Case 2: Challenges at Australia Post 426
Innovation 389
Case 3: Nyrstar NV: a case study in a failed vertical
Product innovation 391
integration strategy 432
Entrepreneurs 391
Case 4: Pfizer 442
International entrepreneurship 392
Internal innovation 393 Case 5: Atlassian 454
Incremental and radical innovation 393 Case 6: The Sunshine Coast UNESCO Biosphere
Implementing internal innovations 394 Reserve and Smart City: a new governance
Cross-functional product development teams 395 opportunity in a post-pandemic world? 458
Facilitating integration and innovation 396
Case 7: CrossFit at the crossroads 465
Creating value from internal innovation 396
Innovation through cooperative strategies 397 Case 8: The movie exhibition industry: 2018
and beyond 482
Strategic focus: Social networking websites facilitate
innovation: application software innovation 398 Case 9: Pacific Drilling: the preferred offshore driller 506
Innovation through acquisitions 399 Case 10: The trivago way - growing
Strategic focus: Will these acquisitions lead to innovation
without growing up? 522
success or to strategic failure? 400
Creating value through strategic Case 11: The Volkswagen emissions scandal 539
entrepreneurship 401 Case 12: Otis in the global elevator industry 549
STUDY TOOLS 403 Case 13: Dick Smith: the fall of an Aussie icon 555
GLOSSARY 566
NAME INDEX 572
SUBJECT INDEX 580
xii

Guide to the text

As you read this text you will find a number of features in every
chapter to enhance
4
your study of strategic management and help
PART 1: STRATEGIC MANAGEMENT INPUTS
you understand how the theory is applied in the real world.

CHAPTER-OPENING FEATURES
two partners formed a 50:50 joint venture company – for the company, hopefully, its growth post the Covid-19
Connaught Plaza Restaurant – to set up outlets in the pandemic.
north and the east under the franchisee model. To date, CHAPTER 1 3 Sources: C. Smith, 2020, 50 interesting McDonald’s statistics and facts
STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS

McDonald’s has two business entities in India. Amit Jatia’s 2020, DMR Business Statistics, https://expandedramblings.com/index.php/
OPENING CASE STUDY 2

1 Knowledge objectives
mcdonalds-statistics, 28 May; R. Darling, 2019, Thanks to the Happy Meal,
Strategic management and strategic
Hardcastle Restaurants runs the McDonald’s business 1
McDonald’s and brand recognition McDonald’s is the largest toy manufacturer, http://www.considerable.com,
competitiveness in southern and western India. McDonald’s India is McDonald’s in Australia is part of a global empire of fast- to almost 0.8 per cent of the world’s population. In 2018, Identify the key concepts
6 November; 2019, KFC is most popular food chain in China, http://www.
food restaurants. McDonald’s has achieved substantial McDonald’s had 37 855 total restaurants globally located
businessinsider.com, 8 March; The Economic Times, 2019, Vikram Bakshi is
committed to sourcing almost all of its products from that the chapter will cover
international success over the years, with its restaurants in 120 different countries and 14 155 stores in the US

1
spread widely throughout the world. Brand recognition alone. China has 2223 stores compared with Japan 2975,
finally out, and McDonald’s India is lovin’ it, ET Online, https://economictimes.
CHAPTER

Learning Objectives is huge: many people know about, and are customers the UK 1261, Canada 1443 and Australia 920. Globally,

within the country. For this purpose, it has developed

Studying this chapter should provide you with the strategic management knowledge
of, McDonald’s. For example, a recent survey found that
88 per cent of people recognise the golden arches and
needed to: associate them with McDonald’s. Each day, about 69
McDonald’s hires 1.9 million employees, and it hires
approximately one million employees per year in the
with the learning objectives
indiatimes.com/industry/services/hotels-/-restaurants/vikram-bakshi-is-
USA. In 2018, its annual revenue was $21 billion and its

local Indian businesses, which can supply the highest- million people eat at a McDonald’s store, which equates net income was $5.9 billion. finally-out-and-mcdonalds-india-is-lovin-it/articleshow/69309704.cms?utm_
LO1
LO2
analyse the components of the strategic management process
describe the competitive landscape and explain how globalisation and
45 000
that start each chapter.
source=contentofinterest&utm_medium=text&utm_campaign=cppst, 14 May; T.
LO3
quality products required for its Indian operations.
technological changes shape it
use the industrial organisation (I/O) model to explain how companies can earn
40 000

35 000
38 000

DiChristopher, 2015, McDonald’s new CEO faces many problems, CNBC, http://
above-average returns
The McDonald’s empire is obviously difficult to control www.cnbc.com/2015/01/29/how-mcdonalds-new-ceo-can-turn-around-the-
Number of restaurants
30 000

LO4 use the resource-based model to explain how companies can earn above-

Opening Case study

25 000

company.html, 29 January; FT Reporters, 2015, McDonald’s and its challenges

25 000
average returns
LO5 and constantly presents country-specific challenges.
describe vision and mission and discuss their value
20 000

worldwide: A market-by-market look, Financial Times, http://www.ft.com/intl/

Gain an insight into how 2
LO6 define and classify the four major stakeholder groups and describe their ability
15 000

Clever strategy is important for its continued survival and,

to influence organisations 10 000 9000
cms/s/0/f8ac22fc-a7c1-11e4-8e78-00144feab7de.html#slide0, 29 January.
LO7 describe the work of strategic leaders. 5000

strategic management
5000
2000
1000
0
1968 1972 1978 1986 1999 2020

As we can see from the opening case, McDonald’s

theories organisations
relate to the in Australia, the UK,
McDonald’s: Restaurant expansion since 1955.

real
Source: https://mcdonalds.com.au/about-maccas/maccas-story.

China, India, Japan and the USA are all world

in different competitive positions. Therefore,
Given that McDonald’s includes a toy in about 20 China is a promising arena but there are continuing
per cent of its sales, it is considered the world’s largest
distributor of toys. Each year, McDonald’s distributes through the case
pressures there, with high levels of rivalry from KFC.
There are now over 2000 McDonald’s outlets in China,

we can conclude that they are not equally competitive (i.e. they are
ofunable to achieve
1.5 billion toys globally, which is more than Mattel which is approximately one-third the number of KFC

study at the beginning

and Hasbro. McDonald’s decided early to move into outlets. KFC has around 5919 stores and is presently
international markets, and now one can find the golden considered the most popular fast-food chain in China.

similar strategic competitiveness). In the USA,

eachthe organisation is now using the strategic
arches in far-flung locations around the globe. In India, where historically the brand was relatively

chapter.
In Australia, ‘Maccas’ (the locals’ name for the small with only 400 stores compared with China, Japan
organisation) is thriving, with flexible offerings, ‘gourmet and Australia, McDonald’s turned a corner when it

management process (see Figure 1.1) as the foundation for changes to the commitments,
coffee’ and fresh-food bars. These have been successful announced in May 2019 that it had finally acquired full
moves. The UK arm has also been responsive to ownership of Connaught Plaza Restaurants. This entity
consumer demand; for example, it accommodates had run the global giant’s operations in north and east

decisions and actions it undertook to pursue strategic competitiveness and above-average

consumers who ask what goes into their food, providing India – from its long-estranged business partner Vikram
information to staff that allows them to respond, and it Bakshi. The association between Bakshi and McDonald’s
promotes jobs in the chain as upwardly mobile. commenced in 1995 when, under a 25-year deal, the

2 terms. It may well succeed, given time.1

BK-CLA-HANSON_7E-210018-Chp01.indd 2 08/02/21 12:49 PM BK-CLA-HANSON_7E-210018-Chp01.indd 3 2/8/21 7:23 PM

The strategic management process

As explained in the opening case, McDonald’s is trying to enrich its traditional approach
FEATURES WITHIN CHAPTERS
globally with more marketing and by making its stores more responsive to local consumers’
needs. A study conducted to identify the factors that contribute to the success of top corporate
performers shows why the organisation is doing this. This study found that the top performers
KEY TERMS WITH MARGIN DEFINITIONS STRATEGIC
were entrepreneurial, were market FOCUS BOXES
oriented (possessing effective knowledge of the customers’
needs), used
16 valuable competencies
PART 1: STRATEGIC MANAGEMENT INPUTS and offered innovative products and services.
2

Examine
The types the waysexhibited
of behaviours in which bykeytop conceptsperformers are appliedlike McDonald’s in represent a
strategic management a business context, using
strategic management process (see Figurereal situations
century, based on the fact that and familiar
1.1), which is a full set of commitments,
Apple under his leadership
Definitions or had transformed four industries, three of them in a
process
decisions local and international
and actions companies.
required for an organisation
decade. In addition, Thein 2020 Strategic
toFast
achieve Focus
strategic
Company named Apple in
competitiveness
explanations of the full set of commitments, the World’s Most Innovative Companies list. Apple is one

decisions and actions and earn above-average returns. The

boxes are categorised to organisation’s
emphasise the firstfocus:step in the process is to analyse
general,
of the top companies in the world based on almost any

important key terms are

criterion or set of criteria used. Because of this, Apple is
required for an organisation its external environment
ethics, and internal
technology, organisation
sustainability
rate has beenand
to determine
globalisation. its resources, capabilities
perceived exceptionally well by customers. Apple’s growth
extraordinary and its financial performance
located in the margin to achieve strategic
and core competencies – the sources of its ‘strategic inputs’.
iPhones nowWe exceedwill now analyse each of
even more impressive. And the appeal of Apple’s products
competitiveness and earn is global. For example, Apple’s
for quick reference. above-average returns the different components of the strategicwere
management process.
925 million units globally. Apple also disclosed that there
1.4 billion active devices as of January 2019.
Although there are many reasons for its success,
strategic competitiveness Strategic Apple
competitiveness is achieved
retail stores enjoy a steady flow of traffic each day.
More remarkable is that Apple’s stores in China handled
when
the primary anrestorganisation
reasons successfully formulates
with Apple’s new technology
development and innovative new products.
achieved when an and implements a Apple
value-creating strategy.
in excess of 40 000 people daily prior to the Covid-19
pandemic. has opened 510 retail stores across 25 A strategy is an integrated and coordinated set
Sources: MacRumors Staff, 2020, Keep track of Apple’s retail stores
worldwide, http://www.macrumors.com, 12 May; Above Avalon, 2019,
organisation successfully
of commitments and City;actions
Singapore Airport;designed
and Taipei, Taiwan. to exploit core competencies and gain a competitive
countries, with 271 located in the United States alone. http://www.aboveavalon.com, 30 May; Fortune, 2011, World’s most
Apple’s newest locations include: Kawasaki and Tokyo, admired companies, http://www.fortune.com, 3 March; B. Worthen,
formulates and implements a Japan; Mexico 2011, With new iPad, Apple tries to stay ahead of wave of tablet rivals,

value-creating strategy advantage. When choosingSource: a Newspix/Alan

strategy, organisations make choices among competing
Wall Street Journal, http://www.online.wsj.com, 3 March; G. A. Fowler &
Pryke N. Wingfield, 2011, Apple’s showman takes the stage, Wall Street Journal,
http://www.online.wsj.com, 3 March; Financial Times, 2011, Apple and

alternativesthe
asintroduction
the pathway for deciding how they will pursue strategic competitiveness. 3
Apple has achieved phenomenal success with the tablets, http://www.ft.com, 1 March; N. Louth, 2011, Finding value in
strategy Apple’s core, Financial Times, http://www.ft.com, 25 February; M. Helft,

STRATEGY NOW
of innovative products and brand
2011, After iPad’s head start, rival tablets are poised to flood offices,
maintenance. The late Steve Jobs was selected by Fortune
an integrated and coordinated
In this sense, the chosen strategy indicates what the organisation will do as well as
New York Times, http://www.nytimes.com, 20 February; L. Chao, 2011,
magazine as the CEO of the first decade of the 21st New Shanghai Apple store will be biggest in China, Wall Street Journal,

set of commitments and http://www.online.wsj.com, 18 February.

actions designed to exploit
Strategy Now margin icons highlight companies
core competencies and gainthat
a Increasing knowledge intensity
competitive advantage
have effectively put a strategic management tool,
concept or technique into practice.
BK-CLA-HANSON_7E-210018-Chp01.indd 4
what the organisation will not do. An organisation’s strategy also demonstrates how it
differs from its competitors.
STRATEGY NOW
Knowledge (information, intelligence and expertise) is the basis of technology and its
Apple’s drive to innovate
application. In the competitive landscape of the 21st century, knowledge is a critical
organisational resource and an increasingly valuable source of competitive advantage.75
Indeed, starting in the 1980s, the basis of competition shifted from hard assets to
intangible resources; for example, ‘Walmart transformed retailing through its proprietary
approach to supply chain management and its information rich relationships with customers
and suppliers’.76 Relationships with customers and suppliers are an example of an intangible
resource.
Knowledge is gained through experience, observation and inference, and is an intangible 08/
resource. The value of intangible resources, including knowledge, is growing as a proportion
of total shareholder value in today’s competitive landscape.77 In fact, the Brookings
Institution estimates that intangible resources contribute approximately 85 per cent of
that value.78 The probability of achieving strategic competitiveness is enhanced for the
organisation that develops the ability to capture intelligence, transform it into useable
knowledge and diffuse it rapidly throughout the company.79 Therefore, organisations
must develop (e.g. through training programs) and acquire (e.g. by hiring educated and
experienced employees) knowledge, integrate it into the organisation to create capabilities,
and then apply it to gain a competitive advantage. 80
 GUIDE TO THE TEXT xiii

CHAPTER 2 75

END-OF-CHAPTER FEATURES
THE ExTERnAL EnvIROnmEnT: OPPORTUnITIES, THREATS, InDUSTRy COmPETITIOn AnD COmPETITOR AnALySIS
CHAPTER 2 75
THE ExTERnAL EnvIROnmEnT: OPPORTUnITIES, THREATS, InDUSTRy COmPETITIOn AnD COmPETITOR AnALySIS

STUDy TOOLS
STUDy TOOLS
SUMMARY
SUMMARY
At the end of each chapter you’ll find several tools to help you to
LO1 The organisation’s external environment is challenging
CHAPTER 2
THE ExTERnAL EnvIROnmEnT: OPPORTUnITIES, THREATS, InDUSTRy COmPETITIOn AnD COmPETITOR AnALySIS
model of competition comprises the threat of
75

review, practise
STUDy and extend your knowledge of the key learning objectives.
and complex. The external environment has three
LO1 The organisation’s external environment is challenging

TOOLS
major parts: the general environment (elements in
and complex. The external environment has three
entry, the power of suppliers, the power of buyers,
model of competition comprises the threat of
product substitutes and the intensity of rivalry
entry, the power of suppliers, the power of buyers,
the broader society that affect industries and their among competitors. By studying these forces, the
major parts: the general environment (elements in product substitutes and the intensity of rivalry
organisations), the industry environment (factors that organisation can find a position in an industry where
the broader society that affect industries and their among competitors. By studying these forces, the
influence an organisation, its competitive actions and it can influence the forces in its favour or where it can
SUMMARY
organisations), the industry environment (factors that
responses, and the industry’s profit potential) and the
organisation can find a position in an industry where
buffer itself against the power of the forces in order
influence an organisation, its competitive actions and it can influence the forces in its favour or where it can
LO1 The
competitor environment
organisation’s external(inenvironment
which the organisation
is challenging to achieve
model strategic competitiveness
of competition comprises the threatand earnof above-
responses, and the industry’s profit potential) and the buffer itself against the power of the forces in order
analyses
and eachThe
complex. major competitor’s
external future has
environment objectives,
three average
entry, thereturns.
power of suppliers, the power of buyers,
competitor environment (in which the organisation to achieve strategic competitiveness and earn above-
currentparts:
major strategies, assumptions
the general environmentand capabilities).
(elements in LO5 average
product substitutes and the intensity of rivalry
analyses each major competitor’s future objectives,
LO2 the
Thebroader
external
current
society that affect
environmental
strategies, assumptions
industries
analysis and has
process theirfour
and capabilities).
Industries
among
are populated with different strategic
returns.
groups.competitors.
A strategic group By studying these forces,
is a collection
LO5 Industries are populated with different strategic
of the Summary
organisations),
steps: scanning,the industry environment (factors that organisation
organisationscan find a position in an industry
alongwhere
monitoring,
Through environmental
forecasting and
LO2 The external environmental analysis process has four
influence an organisation, its competitive
analyses,
assessing.
actions and
the organisation
steps: scanning, monitoring, forecasting and assessing.
it can influence
following similar strategies
groups. A strategic group is a collection of
the forcesrivalry
dimensions. Competitive in its favour or where
is greater
organisations following similar strategies along similar
similar
withinitacan The end-of-chapter summary lists key points from
responses, and the industry’s profit potential) and the buffer itself against
thanthe power strategic
of the forces in order
identifies opportunities and threats.
Through environmental analyses, the organisation
competitor environment (in which the organisation
LO3 identifies
The general environment has seven segments:
strategic group between
dimensions. Competitive rivalry is greater within a
to achieve strategic competitiveness and earn above-
LO6 strategic
Competitor analysis
groups.
the chapter, providing a snapshot of the important
opportunities and threats. group thanfocuses
between onstrategic
each company
groups.against
analyses each major competitor’s future objectives, average returns.
demographic, economic, political/legal, sociocultural,
LO3 current
The general environment
strategies, has seven
assumptions and segments:
capabilities).
technological, global and physical. For each segment,
which an organisation directly competes. Critical to
LO6 Competitor analysis focuses on each company against
LO5 Industries
an effectiveare populated
competitor with different
analysis strategic
is gathering data and
concepts covered.
demographic, economic, political/legal, sociocultural, which an organisation directly competes. Critical to
LO2 The external environmental
the organisation analysis
has to determine process
the strategichas four groups.
informationA strategic
that can group
help is
thea organisation
collection of understand
technological, global and physical. For each segment, an effective competitor analysis is gathering data and
steps:
relevance of environmental changes andand
scanning, monitoring, forecasting assessing.
trends. organisations
its competitors’ following
intentionssimilar strategies
and the strategicalong similar
implications
the organisation has to determine the strategic information that can help the organisation understand
Through environmental analyses, the organisation dimensions.
resulting from Competitive rivalry is greater
them. Organisations within a
must follow
LO4 Compared with the general environment,
relevance of environmental changes and trends. the its competitors’ intentions and the strategic implications
identifies opportunities and threats. strategic
mandatory group
lawsthan
and between
regulations strategic
as wellgroups.
as ethical
industry environment has a more direct effect on resulting from them. Organisations must follow
LO4 Compared with the general environment, the
LO3 The general environment
the organisation’s strategichas seven The
actions. segments:
five forces LO6 Competitor
guidelines when gathering
analysis focusescompetitor intelligence.
on each company against
industry environment has a more direct effect on mandatory laws and regulations as well as ethical
demographic, economic, political/legal, sociocultural, which an organisation directly competes. Critical to
the organisation’s strategic actions. The five forces guidelines when gathering competitor intelligence.
technological, global and physical. For each segment, an effective competitor analysis is gathering data and
KEY TERMS
the organisation has to determine the strategic
relevance of environmental changes and trends.
information that can help the organisation understand
its competitors’ intentions and the strategic implications Key terms
KEY TERMS
competitor intelligence general environment opportunity sociocultural segment
LO4 Compared with the general environment, the
complementors
competitor intelligence
industry
global segment
environment has general environment
a more direct effect on
resulting from them. Organisations must follow
physical
opportunityenvironment
mandatory laws and regulationsstrategic group
sociocultural
as well segment
as ethical
Review the important terminology from the chapter
segment
demographic
complementors segment strategicglobal
the organisation’s
economic environment
industry
industry
segment
actions. The five forces guidelines
physical environment
political/legal
segment segment
technological
when gathering strategic
competitor group segment
intelligence.
margin with the Key terms list.
demographic segment industry environment threat
technological segment
economic environment industry environment political/legal segment threat
KEY TERMS
REVIEW QUESTIONS
competitor intelligence general environment opportunity sociocultural segment
REVIEW
1.
complementors QUESTIONS
Why is it important for an organisation to study and
global segment 4. What
physical are the seven segments
environment of the group
strategic general
understand the external environment? environment? Explain the differences among them. Is
segment
Review questions
1. Why is it important
demographic segment for an organisation
industry to study and 4. What are the seven segments of the general
technological segment
2. understand
What are thethedifferences between the general any segment more important than another?
economic environment external environment?
industry environment environment?
political/legal segmentExplain the differences
threat among them. Is
environment and the industry environment? Why are 5. any
Howsegment
do the five forces of competition in an industry
2. What are the differences between the general
these differences important?
environment and the industry environment? Why are
more important than another?
affect its profit potential? Explain.
5. How do the five forces of competition in an industry
These questions promote the application and critical
REVIEW QUESTIONS
3. these
What are the four important?
differences steps in the external environmental 6. affect
What is itsthe importance
profit ofExplain.
potential? collecting and interpreting
analysis of theories and practices as well as encourage
analysis process? What does the organisation want to data and information about competitors? What practices
3. Why
1. Whatisare the four steps
it important inorganisation
for an the external to
environmental
study and 6. What
4. What are
is thetheimportance of collecting
seven segments and interpreting
of the general
learn when using this process?
analysis process?
understand What does
the external the organisation want to
environment?
should an organisation use to gather competitor
data and information
environment? Explain about
intelligence, and why?
competitors?
the differences among What practices
them. Is group discussion.
learn when using this process? should
any an organisation
segment use to than
more important gather competitor
another?
2. What are the differences between the general
intelligence, and why?
76 environment and the industry
PART 1: STRATEGIC MANAGEMENTenvironment?
INPUTS Why are 5. How do the five forces of competition in an industry
these differences important? affect its profit potential? Explain.
3. What are the four steps in the external environmental 6. What is the importance of collecting and interpreting
analysis process? What does the organisation want to data and information about competitors? What practices
EXPERIENTIAL
learn when using thisEXERCISES
BK-CLA-HANSON_7E-210018-Chp02.indd 75 2/9/21 1:13 PM
process? should an organisation use to gather competitor
BK-CLA-HANSON_7E-210018-Chp02.indd 75 intelligence, and why? 2/9/21 1:13 PM

Exercise 1: Strategic group mapping
If a given set of organisations emphasise similar strategic
dimensions and use a similar strategy, these organisations
can be said to reside in the same strategic group. Other
common definitions of strategic groups typically argue
BK-CLA-HANSON_7E-210018-Chp02.indd 75
that the organisations in a given industry follow similar
5. What conclusions can you reach about why some
organisations end up where they do among various
strategic groups?
Experiential exercises
Exercise 2: What does the future look like?
A critical ingredient in studying the general environment
These exercises emphasise applied learning, giving
2/9/21 1:13 PM

strategies, such as pricing, degree of specialisation, research
and development commitment and the like. It is also likely
that organisations operating in a given industry may have
very different profitability profiles, which raises the question:
if one organisation is the most profitable, why don’t all
the others in that industry attempt to move into the same
strategic group as the industry leader?
Part 1
1. Form teams and pick an industry the team finds
interesting. A list of industries and industry leaders may
be found at yahoo! Finance (http://biz.yahoo.com/ic/
ind_index.html).
2. Investigate this industry in order to create a strategic
group map. you must pick the two dimensions for your
is identifying opportunities and threats. An opportunity is
a condition in the environment that, if exploited, helps a
students the opportunity to put knowledge into practice.
company to achieve strategic competitiveness. In order to
identify opportunities, you must be aware of trends that
affect the world around us now or that are projected to do
so in the future.
Thomas Fry, senior futurist at the Davinci Institute,
believes that the chaotic nature of interconnecting trends
and the vast array of possibilities that arise from them are
somewhat akin to watching a spinning compass needle.
END-OF-BOOK FEATURES
From the way we use phones and email and recruit new
workers to organisations, the climate for business is
changing and shifting dramatically, and at rapidly increasing
rates. Sorting out these trends and making sense of them
provides the basis for opportunity decision making. Which
Case Studies

PART 4
ones will dominate and which ones will fade? Understanding
map that best represent the key success factors in this
this is crucial for business success.

3.
industry (e.g. R&D investments, pricing, geographic reach).
For each organisation listed on your map, investigate its
your challenge (either individually or as a group) is to Apply the case analyses process to in-depth case
identify a trend, technology, entertainment or design that is
overall financial performance, not only historically, but
also its five-year growth forecast. (This information is
likely to alter the way in which business is conducted in the studies. Thirteen case studies are provided to
future. Once you have identified this, be prepared to discuss
also available at yahoo! Finance and other locations.) which of the six dimensions of the general environment this demonstrate theory in practice.
will affect. (There may be more than one.)
Part 2
Prepare a presentation to the class that discusses your CASE STUDIES
•
• Describe the impact.
List some business opportunities that will come from
Each case includes a Case Link identifying the
findings and answers the following key issues or questions:
1. Who are the most direct competitors and on what INTRODUCTION
basis
this.
CASE 7 relevant chapters where key concepts explored in the
• Identify some existing organisations that stand to
A summary of the
do they mostly compete? That is, why did you choose case
benefit. CrossFit at the crossroads 520 case are introduced in the book.
the competitive dimensions that you did? analysis process
• 466
What, if any, are the ethical implications?
2. How does profitability stack up between strategic CASE 8
you should consult a wide variety of sources. For
groups? Which groups are most profitable, and CASE
why? 1 The movie exhibition
example, the Gartner Group and mcKinsey & Co. both
3. What would it take for an organisation to move JB fromHi-Fi Ltd acquisition of industry: 2015 and
produce market research and forecasts for business. There
The Good Guys
an underperforming (in terms of profitability) strategic is also a host of469 beyond tools and addresses.
web forecasting 538
group to a more profitable strategic group? How likely is These include TED (see http://www.ted.com for videos of its
it that this could happen? CASE 2 discussions), which hostsCASE 9
an annual conference for path-
Challenges atbreaking
4. Think about one of the organisations in a particular Australia Pacific the
new ideas. Similarly, drilling: theInstitute, Institute
Davinci
strategic group. Are there any opportunities for Post
this 480and preferred
for Global Futures a wide rangeoffshore driller
of others have 565
their own
organisation that you see because of your strategic unique visions of tomorrow’s environment.
group mapping? CASE 3 CASE 10
Nyrstar NV: a case study in The trivago way – growing
a failed vertical integration without growing up? 582
strategy 486
CASE 11
BK-CLA-HANSON_7E-210018-Chp02.indd 76 CASE 4 The Volkswagen 2/9/21 1:13 PM

Virgin Australia: a flight to emissions scandal 600

oblivion? 496
CASE 12
CASE 5 Otis in the global elevator
Atlassian 508 industry 611
CASE 6 CASE 13
xiv

Guide to the online resources

FOR THE INSTRUCTOR

Cengage is pleased to provide you with a selection of resources

that will help you prepare your lectures. These teaching tools
are accessible via cengage.com.au/instructors for Australia
or cengage.co.nz/instructors for New Zealand.

MINDTAP
Premium online teaching and learning tools are available on the MindTap platform – the personalised eLearning
solution.
MindTap is a flexible and easy-to-use platform that helps build student confidence and gives you a clear picture of
their progress. We partner with you to ease the transition to digital – we’re with you every step of the way.
The Cengage Mobile App puts your course directly into students’ hands with course materials available on their
smartphone or tablet. Students can read on the go, complete practice quizzes or participate in interactive real-time
activities.
MindTap for Hanson’s Strategic Management is full of innovative resources to support critical thinking, and help your
students move from memorisation to mastery! Includes:
• Hanson’s Strategic Management eBook
• ‘What would you do?’ polling questions
• Video Cases
• ‘You make the decision’ simulation activities.
MindTap is a premium purchasable eLearning tool. Contact your
Cengage learning consultant to find out how MindTap can transform
your course.

INSTRUCTOR’S MANUAL
The Instructor’s Manual includes: • instructor’s notes for experiential exercises
• knowledge objectives • instructor’s notes for MindTap including What Would
• chapter outlines You Do?, You Make the Decision and Video Cases.
• lecture notes • additional questions and exercises.
• answers to review questions

CASE STUDY RESOURCES

Case notes for each of the end-of-book case studies, a case analysis rubric and case matrix allow instructors to
assign case studies for analysis. Cases and case notes from the previous editions are also available.

TEST BANK
A bank of questions has been developed in conjunction with the text for creating quizzes, tests and exams for your
students. Create multiple test versions in an instant and deliver tests from your LMS, your classroom, or wherever you
want using Cognero. Cognero test generator is a flexible online system that allows you to import, edit and manipulate
content from the text’s test bank or elsewhere, including your own favourite test questions.
 GUIDE TO THE ONLINE RESOURCES xv

POWERPOINT™ PRESENTATIONS
Use the chapter-by-chapter PowerPoint presentations to enhance your lecture presentations and handouts to
reinforce the key principles of your subject.

ARTWORK FROM THE TEXT

Add the digital files of graphs, pictures and flowcharts into your course management system, use them in student
handouts, or copy them into your lecture presentations.

FOR THE STUDENT

MINDTAP
MindTap is the next-level online learning tool that helps you get better grades!
MindTap gives you the resources you need to study – all in one place and available when you need them. In the
MindTap Reader, you can make notes, highlight text and even find a definition directly from the page.
If your instructor has chosen MindTap for your subject this semester, log in to MindTap to:
• Get better grades
• Save time and get organised
• Connect with your instructor and peers
• Study when and where you want, online and mobile
• Complete assessment tasks as set by your instructor.
When your instructor creates a course using MindTap, they will
let you know your course key so you can access the content.
Please purchase MindTap only when directed by your instructor.
Course length is set by your instructor.
xvi

PREFACE
This new seventh Asia–Pacific edition of Strategic Management: Competitiveness and Globalisation has been updated
to include new material and cases from Australia, New Zealand and the Asia–Pacific region. It continues to
integrate ‘cutting edge’ research and content from the US authors Hitt, Ireland and Hoskisson.

Features
• Australian and Asia–Pacific material in all chapters
• chapter opening cases and ‘Strategic focus’ segments
• organisation-specific examples that are integrated with each chapter’s topic
• inclusion of public sector and community organisation examples
• substantial emphasis on use of the internet and e-commerce
• substantial emphasis on corporate governance
• coverage of strategic issues in the 21st-century competitive landscape, including a strong emphasis on the
competition created through e-commerce ventures and start-ups
• global coverage with an emphasis on the international context
• new and current research integrated throughout the chapters’ conceptual presentations
• review questions, including application discussion questions and ethics questions at the end of each chapter
• experiential exercises
• a summary of the case analysis process.
The book emphasises a global outlook with comprehensive coverage of Australian and international concepts
and issues. The book contains a wealth of references. Drawn from the business literature and academic research,
these materials are used to present current and accurate descriptions of how organisations use the strategic
management process. Our goal while preparing this book has been to present you, our readers, with a complete,
accurate and up-to-date explanation of the strategic management process as it is used in the global economy. We
have sought to include enough local content to stimulate interest, and enough international content to reflect the
nature of current strategic management.

The book’s focus

This book is intended for use primarily in strategic management and business policy courses. The materials
presented in the 13 chapters have been researched thoroughly. Both the academic, scholarly literature and the
business, practitioner literature were studied and then integrated to prepare this edition. The academic literature
provides the foundation to develop an accurate yet meaningful description of the strategic management process.
The business practitioner literature yields a rich base of current domestic and global examples to show how the
strategic management process’s concepts, tools and techniques are applied in different organisations.
Our discussion of the strategic management process is both traditional and contemporary. In maintaining
tradition, we examine important materials that have historically been a part of understanding strategic
management. For example, we thoroughly examine how to analyse an organisation’s external environment and
internal environment.
 PREFACE xvii

The strategic advantage

The strategic management process is critical to organisational success. As described in Chapter 1, strategic
competitiveness is achieved when an organisation develops and exploits a sustained competitive advantage.
Attaining such an advantage results in the earning of above-average returns; that is, returns that exceed those
an investor could expect from other investments with similar amounts of risk.

The competitive advantage

Success in the 21st-century competitive landscape requires specific capabilities, including the abilities to:
1 use scarce resources wisely to maintain the lowest possible costs
2 constantly anticipate frequent changes in customers’ preferences
3 adapt to rapid technological changes
4 identify, emphasise and effectively manage what an organisation does better than its competitors
5 continuously structure an organisation’s operations so objectives can be achieved more efficiently
6 successfully manage and gain commitments from a culturally diverse workforce.

The global advantage

Critical to the approach used in this text is the fact that all organisations face increasing global competition.
Organisations no longer operate in relatively safe domestic markets, as Australian supermarkets have discovered.
In the past, many companies produced large quantities of standardised products. Today, organisations typically
compete in a global economy that is complex, highly uncertain and unpredictable. To a greater degree than in a
primarily domestic economy, the global economy rewards effective performers, whereas poor performers are forced
to restructure significantly to enhance their strategic competitiveness. As noted earlier, increasing globalisation
and the technological revolution have produced a new competitive landscape in the 21st century. This landscape
presents a challenging and complex environment for organisations, but one that also has opportunities. The
importance of developing and using these capabilities should not be underestimated.

Final comment
Organisations face exciting and dynamic competitive challenges in the 21st century. These challenges, and
effective responses to them, are explored in Strategic Management: Competitiveness and Globalisation. The strategic
management process conceptualised in this text offers valuable insights and knowledge to those committed to
meeting successfully the challenge of dynamic competition. Thinking strategically – as this book challenges you
to do – increases the likelihood that you will assist your organisation to achieve strategic success. In addition,
continuous practice with strategic thinking and the use of the strategic management process gives you skills and
knowledge that will contribute to career advancement and success. Finally, we want to wish you all the best and
nothing other than complete success in all of your endeavours.
Dallas Hanson
Hobart
xviii

ABOUT THE AUTHORS

Dallas Hanson
Dallas Hanson lectured in strategic management at the University of Tasmania for many years. He has wide-
ranging intellectual (and scholastic) interests, including brand management, tourism, green strategy and
governance. He has won teaching awards for his work in strategy and enjoys the challenge of making strategy
interesting and engaging. He now advises as a strategy consultant, which continually reminds him that
organisation politics matter in the world of strategy, while logic does not always win in the process of strategy
implementation.

Kim Backhouse
Kim Backhouse has lectured in strategic management, law and other business units for the past two decades in
the Faculty of Business and Faculty of Law at the University of Tasmania. Kim has also facilitated units in legal
and risk for the Australian Institute of Company Directors and runs short courses on governance through the Law
School at the University of Tasmania. Kim is passionate about research and teaching in strategic management
and governance and enjoyed being part of Dr Hanson’s teaching team in strategy for many years. Dr Backhouse
has published in a variety of journals on governance and corporate social responsibility. She has won teaching
awards for many years for her work in strategy and organisational behaviour. Dr Backhouse also works in part-time
executive roles outside of the academic landscape and consults regularly to boards on complex governance issues.
Kim has a current practising certificate from the Law Society of Tasmania, Fellow of the Governance Institute
of Australia and is a current board member of the Governance Institute of Australia (Tas). Kim currently sits on
several not-for-profit boards such as ACHAT and has been sitting on various boards for the past two decades.

David Leaney
David Leaney lectures in strategic management at post-graduate level at the Australian National University
(ANU) and the Australian Graduate School of Management (AGSM) at the University of NSW. He also lectures
in marketing and global supply chain management at post-graduate and under-graduate levels. David brings a
practitioner’s perspective, fuelled by his work as a management consultant and his role as the Managing Director
of Strategium – an IT and business strategy consultancy. David is the chair of several private company boards
in professional services and technology, and advises clients in the public sector, defence, utilities, banking and
the retail sector. He is sought as a facilitator for executive workshops and the development of corporate strategy
and organisational change management. David is a Fellow of the Institute of Managers and Leaders (FIML) and
a Certified Management Consultant (CMC).

Michael A. Hitt
Texas A&M University
Michael A. Hitt is a Distinguished Professor and holds the Joe B. Foster Chair in Business Leadership at Texas A&M
University. He received his PhD from the University of Colorado and has more than 260 publications, including
26 co-authored or co-edited books. He has been recognised as one of the 10 most cited scholars in management
 ABOUT THE AUTHORS xix

over a 25-year period in an article published in the 2008 volume of the Journal of Management. He is co-editor of
numerous management, organisation, strategy and development books and has served on the editorial review
boards of multiple journals, including the Academy of Management Journal, Academy of Management Executive, Journal
of Applied Psychology, Journal of Management, Journal of World Business and Journal of Applied Behavioral Sciences.
In addition, Professor Hitt has served as Consulting Editor and Editor of the Academy of Management Journal and
is currently a co-editor of the Strategic Entrepreneurship Journal. He is the current past president of the Strategic
Management Society, is a past president of the Academy of Management and is a Fellow in the Academy of
Management and in the Strategic Management Society. He received an honorary doctorate from the Universidad
Carlos III de Madrid and is an Honorary Professor and Honorary Dean at Xi’an Jiao Tong University. He has received
the Irwin Outstanding Educator Award and the Distinguished Service Award from the Academy of Management
and has received best paper awards for articles published in the Academy of Management Journal, Academy of
Management Executive and Journal of Management.

R. Duane Ireland
University of Richmond
R. Duane Ireland is a Distinguished Professor and holds the Conn Chair in New Ventures Leadership at the Mays
Business School, Texas A&M University, where he previously served as head of the management department.
He teaches strategic management courses to undergraduate, masters, doctoral and executive students and
has more than 175 publications, including more than a dozen books. His research on diversification, corporate
entrepreneurship and strategic entrepreneurship has been published in Academy of Management Journal, Academy
of Management Executive, Strategic Management Journal, Journal of Management, Strategic Entrepreneurship Journal,
Entrepreneurship Theory and Practice and Journal of Management Studies, among others. He has served on editorial
review boards for the Academy of Management Journal, Journal of Management, Journal of Business Venturing, Journal
of Business Strategy and European Management Journal. He is current editor of the Academy of Management Journal
and has completed editorial terms for Academy of Management Journal, Academy of Management Executive and
Entrepreneurship Theory and Practice. He has co-edited special issues of Academy of Management Review, Academy
of Management Executive, Journal of Business Venturing and Organizational Research Methods.
Professor Ireland has received awards for the best article published in Academy of Management Executive and
Academy of Management Journal. He is a Fellow of the Academy of Management and 21st Century Entrepreneurship
Research Scholar, and served a three-year term as Representative-at-Large for the Academy of Management’s
Board of Governors. He received the Award for Outstanding Intellectual Contributions to Competitiveness Research
from the American Society for Competitiveness and the USASBE Scholar in Corporate Entrepreneurship Award.

Robert E. Hoskisson
The University of Oklahoma
Robert E. Hoskisson is the George R. Brown Chair of Strategic Management at the Jesse H. Jones Graduate School
of Business, Rice University. He received his PhD from the University of California-Irvine. Dr Hoskisson’s research
topics focus on corporate governance, acquisitions and divestitures, corporate and international diversification
xx ABOUT THE AUTHORS

and cooperative strategy. He teaches courses in corporate and international strategic management, cooperative
strategy and strategy consulting. Dr Hoskisson’s research has appeared in more than 120 publications, including
the Academy of Management Journal, Strategic Management Journal, Journal of Management, Journal of International
Business Studies, Journal of Management Studies and the Academy of Management Executive. He has co-authored
26 books, including recent books on business strategic and competitive advantage, and is currently Associate
Editor of the Strategic Management Journal and Consulting Editor for the Journal of International Business Studies. He
also serves on the Editorial Review board for the Academy of Management Journal. Professor Hoskisson has served
on editorial boards for the Academy of Management Journal, Journal of Management, Journal of Management Studies
and Entrepreneurship Theory and Practice, among others. He is Special Professor at the University of Nottingham
and Honorary Professor at Xi’an Jiao Tong University.
Professor Hoskisson is also a Fellow of the Strategic Management Society and has received awards from the
American Society for Competitiveness and the Marriott School of Management, Brigham Young University.
He completed three years of service as Representative-at-Large for the Board of Governors of the Academy of
Management and currently serves on the Board of Directors of the Strategic Management Society.
 xxi

ACKNOWLEDGEMENTS
To my wonderful wife Meg for supporting me in consulting full-time, running three companies, teaching at two
universities, and adding a textbook to my list of additional interests.
David Leaney

This has been a long journey and a heartfelt thanks to my children who have patiently waited on the sidelines for
me to complete my part and who forfeited many weekends with their mother, in pursuit of academic excellence.
I would like to thank Dallas Hanson for his continued support of my academic career and to my dear friends who
have supported me from afar: Dr Kevin Radecki (USA) and Fran Scherrer (Spain). I hope you enjoy this edition.
Kim Backhouse

Cengage would also like to thank Greg Zooeff and Francis Hartnett for contributing new case studies to this
edition, and would also like to thank the following reviewers for their incisive and helpful feedback:
• Nguyen Viet Ngo – Australian National University
• Elisa Backer – Federation University Australia
• Gary Mankelow – University of Newcastle
• David Robinson – Holmes Institute
• Fiona Hurd – Auckland University of Technology
• Harsha Sarvaiya – Griffith University
• Austin Norman – Victoria University
• Ralitza Bell – Australian Catholic University, North Sydney
• Lisa Daniel – University of the Sunshine Coast
• Stuart Middleton – University of Queensland
• Georges Baume – University of Adelaide.

Every effort has been made to trace and acknowledge copyright. However, if any infringement has occurred,
the publishers tender their apologies and invite the copyright holders to contact them.
PART 1
1

STRATEGIC MANAGEMENT
INPUTS
1 Strategic management and strategic
competitiveness 2
2 The external environment:
opportunities, threats, industry
competition, and competitor
analysis 34
3 The internal organisation: resources,
capabilities, core competencies,
and competitive advantages 72

1
 1
CHAPTER Strategic management and strategic
competitiveness
Learning Objectives

Studying this chapter should provide you with the strategic management knowledge
needed to:
LO1 analyse the components of the strategic management process
LO2 describe the competitive landscape and explain how globalisation and
technological changes shape it
LO3 use the industrial organisation (I/O) model to explain how companies can earn
above-average returns
LO4 use the resource-based model to explain how companies can earn above-
average returns
LO5 describe vision and mission and discuss their value
LO6 define and classify the four major stakeholder groups and describe their ability
to influence organisations
LO7 describe the work of strategic leaders.

2

STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS
OPENING CASE STUDY
McDonald’s and brand recognition
McDonald’s in Australia is part of a global empire of fast-
food restaurants. McDonald’s has achieved substantial
international success over the years, with its restaurants
spread widely throughout the world. Brand recognition
is huge: many people know about, and are customers
of, McDonald’s. For example, a recent survey found that
88 per cent of people recognise the golden arches and
associate them with McDonald’s. Each day, about 69
million people eat at a McDonald’s store, which equates
45 000
40 000
35 000
Number of restaurants
30 000
25 000
20 000
15 000
10 000
5000
2000
1000
0
1968 1972
McDonald’s: Restaurant expansion since 1955.
Given that McDonald’s includes a toy in about 20
per cent of its sales, it is considered the world’s largest
distributor of toys. Each year, McDonald’s distributes
1.5 billion toys globally, which is more than Mattel
and Hasbro. McDonald’s decided early to move into
international markets, and now one can find the golden
arches in far-flung locations around the globe.
In Australia, ‘Maccas’ (the locals’ name for the
organisation) is thriving, with flexible offerings, ‘gourmet
coffee’ and fresh-food bars. These have been successful
moves. The UK arm has also been responsive to
consumer demand; for example, it accommodates
consumers who ask what goes into their food, providing
information to staff that allows them to respond, and it
promotes jobs in the chain as upwardly mobile.
CHAPTER 1 3
to almost 0.8 per cent of the world’s population. In 2018,
McDonald’s had 37 855 total restaurants globally, located
in 120 different countries and 14 155 stores in the US
alone. China has 2223 stores compared with Japan 2975,
the UK 1261, Canada 1443 and Australia 920. Globally,
McDonald’s hires 1.9 million employees, and it hires
approximately one million employees per year in the
USA. In 2018, its annual revenue was $21 billion and its
net income was $5.9 billion.
38 000
25 000
9000
5000
1978 1986 1999 2020
Source: https://mcdonalds.com.au/about-maccas/maccas-story.
China is a promising arena but there are continuing
pressures there, with high levels of rivalry from KFC.
There are now over 2000 McDonald’s outlets in China,
which is approximately one-third the number of KFC
outlets. KFC has around 5919 stores and is presently
considered the most popular fast-food chain in China.
In India, where historically the brand was relatively
small with only 400 stores compared with China, Japan
and Australia, McDonald’s turned a corner when it
announced in May 2019 that it had finally acquired full
ownership of Connaught Plaza Restaurants. This entity
had run the global giant’s operations in north and east
India – from its long-estranged business partner Vikram
Bakshi. The association between Bakshi and McDonald’s
commenced in 1995 when, under a 25-year deal, the
 4 PART 1: STRATEGIC MANAGEMENT INPUTS

two partners formed a 50:50 joint venture company –
Connaught Plaza Restaurant – to set up outlets in the
north and the east under the franchisee model. To date,
McDonald’s has two business entities in India. Amit Jatia’s
Hardcastle Restaurants runs the McDonald’s business
in southern and western India. McDonald’s India is
committed to sourcing almost all of its products from
within the country. For this purpose, it has developed
local Indian businesses, which can supply the highest-
quality products required for its Indian operations.
The McDonald’s empire is obviously difficult to control
and constantly presents country-specific challenges.
Clever strategy is important for its continued survival and,
for the company, hopefully, its growth post the Covid-19
pandemic.
Sources: C. Smith, 2020, 50 interesting McDonald’s statistics and facts
2020, DMR Business Statistics, https://expandedramblings.com/index.php/
mcdonalds-statistics, 28 May; R. Darling, 2019, Thanks to the Happy Meal,
McDonald’s is the largest toy manufacturer, http://www.considerable.com,
6 November; 2019, KFC is most popular food chain in China, http://www.
businessinsider.com, 8 March; The Economic Times, 2019, Vikram Bakshi is
finally out, and McDonald’s India is lovin’ it, ET Online, https://economictimes.
indiatimes.com/industry/services/hotels-/-restaurants/vikram-bakshi-is-
finally-out-and-mcdonalds-india-is-lovin-it/articleshow/69309704.cms?utm_
source=contentofinterest&utm_medium=text&utm_campaign=cppst, 14 May; T.
DiChristopher, 2015, McDonald’s new CEO faces many problems, CNBC, http://
www.cnbc.com/2015/01/29/how-mcdonalds-new-ceo-can-turn-around-the-
company.html, 29 January; FT Reporters, 2015, McDonald’s and its challenges
worldwide: A market-by-market look, Financial Times, http://www.ft.com/intl/
cms/s/0/f8ac22fc-a7c1-11e4-8e78-00144feab7de.html#slide0, 29 January.

As we can see from the opening case, McDonald’s organisations in Australia, the UK, China, India, Japan
and the USA are all in different competitive positions. Therefore, we can conclude that they are not equally
competitive (i.e. they are unable to achieve similar strategic competitiveness). In the USA, the organisation
is now using the strategic management process (see Figure 1.1) as the foundation for changes to the
commitments, decisions and actions it undertook to pursue strategic competitiveness and above-average
terms. It may well succeed, given time.1

The strategic management process

As explained in the opening case, McDonald’s is trying to enrich its traditional approach globally with more
marketing and by making its stores more responsive to local consumers’ needs. A study conducted to identify
strategic the factors that contribute to the success of top corporate performers shows why the organisation is doing
management process
this. This study found that the top performers were entrepreneurial, were market oriented (possessing
the full set of
commitments, effective knowledge of the customers’ needs), used valuable competencies and offered innovative products
decisions and and services. 2
actions required for
an organisation to The types of behaviours exhibited by top performers like McDonald’s represent a strategic management
achieve strategic process (see Figure 1.1), which is a full set of commitments, decisions and actions required for an
competitiveness and organisation to achieve strategic competitiveness and earn above-average returns. The organisation’s
earn above-average
returns first step in the process is to analyse its external environment and internal organisation to determine its
strategic resources, capabilities and core competencies – the sources of its ‘strategic inputs’. We will now analyse
competitiveness each of the different components of the strategic management process.
achieved when Strategic competitiveness is achieved when an organisation successfully formulates and implements
an organisation
successfully a value-creating strategy. A strategy is an integrated and coordinated set of commitments and actions
formulates and designed to exploit core competencies and gain a competitive advantage. When choosing a strategy,
implements a value- organisations make choices among competing alternatives as the pathway for deciding how they will
creating strategy
pursue strategic competitiveness. 3
strategy
In this sense, the chosen strategy indicates what the organisation will do as well as what the
an integrated and
coordinated set of organisation will not do. An organisation’s strategy also demonstrates how it differs from its competitors.
commitments and An organisation has a competitive advantage when it implements a strategy that creates superior
actions designed
to exploit core value for customers and that its competitors are unable to duplicate or find too costly to imitate.4 An
competencies and organisation can be confident that its strategy has resulted in one or more useful competitive advantages
gain a competitive only after competitors’ efforts to duplicate its strategy have ceased or failed. In addition, an organisation
advantage
must understand that no competitive advantage is permanent, and this was witnessed in 2020 during the
Covid-19 pandemic. 5 The speed with which competitors are able to acquire the skills needed to duplicate
 CHAPTER 1 5
Strategic management and strategic competitiveness

Figure 1.1 The strategic management process

Chapter 2
The external
environment
Strategic

Strategic intent
inputs

Strategic mission

Chapter 3
The internal
organisation

Strategy formulation Strategy implementation

Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11

Business-level Competitive Corporate-level Corporate Organisational
strategy dynamics strategy governance structure and
controls
Strategic
actions

Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13

Acquisition and International Cooperative Strategic Strategic
restructuring strategy strategy leadership entrepreneurship
strategies

Strategic competitiveness
outcomes
Strategic

Above-average returns

Feedback

the benefits of an organisation’s value-creating strategy determines how long the competitive advantage
will last.6
Above-average returns are returns in excess of what an investor expects to earn from other investments above-average
with a similar amount of risk. Risk is an investor’s uncertainty about the economic gains or losses that will returns
result from a particular investment.7 The most successful organisations learn how to effectively manage returns in excess
of what an investor
risk. Effectively managing risks reduces investors’ uncertainty about the results of their investment. 8 expects to earn from
Returns are often measured in terms of accounting figures, such as return on assets, return on equity other investments
or return on sales. Alternatively, returns can be measured on the basis of stock market returns, such with a similar amount
of risk
as monthly returns (the end-of-the-period stock price minus the beginning stock price, divided by the
beginning stock price, yielding a percentage return). In smaller, new venture organisations, returns are risk
sometimes measured in terms of the amount and speed of growth (e.g. in annual sales) rather than more an investor’s
uncertainty about the
traditional profitability measures9 because new ventures require time to earn acceptable returns (in the economic gains or
form of return on assets and so forth) on investors’ investments.10 losses that will result
from a particular
Understanding how to exploit a competitive advantage is important for organisations seeking to earn investment
above-average returns.11 Organisations without a competitive advantage or that are not competing in an
 6 PART 1: STRATEGIC MANAGEMENT INPUTS

average returns attractive industry earn, at best, average returns. Average returns are returns equal to those an investor
returns equal to those expects to earn from other investments with a similar amount of risk. In the long run, an inability to earn
an investor expects at least average returns results first in decline and, eventually, failure. Failure occurs because investors
to earn from other
investments with a withdraw their investments from those organisations earning less-than-average returns. As we noted
similar amount of risk above, there are no guarantees of permanent success. Even considering its excellent current performance,
McDonald’s still must be careful not to become overconfident, and continue its quest to be the leader in its
markets.
With the information gained from external and internal analyses, the organisation develops its vision
and mission and formulates one or more strategies. To implement its strategies, the organisation takes actions
towards achieving strategic competitiveness and above-average returns. Effective strategic actions that take
place in the context of carefully integrated strategy formulation and implementation efforts result in positive
outcomes. This dynamic strategic management process must be maintained as ever-changing markets and
competitive structures are coordinated with an organisation’s continuously evolving strategic inputs.12
In the remaining chapters of this book, we use the strategic management process to explain what
organisations do to achieve strategic competitiveness and earn above-average returns. These explanations
demonstrate why some organisations consistently achieve competitive success while others fail to do so.13
As you will see, the reality of global competition is a critical part of the strategic management process and
significantly influences organisations’ performances.14 Indeed, learning how to successfully compete in the
globalised world is one of the most significant challenges for organisations competing in the 21st century.15
Several topics are discussed in this chapter. First, we describe the current competitive landscape. This
global economy challenging landscape has been created primarily by the emergence of a global economy, globalisation
one in which goods, resulting from that economy, rapid technological changes and the Covid-19 pandemic. Next, we examine
services, people, skills two models that organisations use to gather the information and knowledge required to choose and
and ideas move freely
across geographic then effectively implement their strategies. The insights gained from these models also serve as the
borders foundation for forming the organisation’s vision and mission. The first model (the industrial organisation
or I/O model) suggests that the external environment is the primary determinant of an organisation’s
strategic actions. Identifying and then competing successfully in an attractive (i.e. profitable) industry
or segment of an industry are the keys to competitive success when using this model.16 The second model
(resource based) suggests that an organisation’s unique resources and capabilities are the critical link to
strategic competitiveness.17 Thus, the first model is concerned primarily with the organisation’s external
environment, while the second model is concerned primarily with the organisation’s internal environment.
After discussing vision and mission, direction-setting statements that influence the choice and use of
strategies, we describe the stakeholders that organisations serve. The degree to which stakeholders’ needs
can be met increases when organisations achieve strategic competitiveness and earn above-average returns.
Closing the chapter are introductions to strategic leaders and the elements of the strategic management
process.
For ease, this book is divided into three parts. In Part 1, we describe what organisations do to
analyse their external environment (Chapter 2) and internal organisation (Chapter 3). These analyses
are completed to identify marketplace opportunities and threats in the external environment (Chapter
2), and to decide how to use the resources, capabilities, core competencies and competitive advantages in
the organisation’s internal organisation to pursue opportunities and overcome threats (Chapter 3). The
analyses explained in Chapters 2 and 3 comprise the well-known SWOT analyses (strengths, weaknesses,
opportunities and threats).18 (In our analysis, the important ‘strengths’ concept is made more sophisticated
by using the ideas of capabilities and core competencies.) With knowledge about its external environment
and internal organisation, the organisation forms its strategy considering the organisation’s vision and
mission.
The organisation’s strategic inputs (see Figure 1.1) provide the foundation for choosing one or more
strategies and deciding how to implement them. As suggested in Figure 1.1 by the horizontal arrow linking
the two types of strategic actions, formulation and implementation must be simultaneously integrated
 CHAPTER 1 7
Strategic management and strategic competitiveness

to successfully use the strategic management process. Integration happens as decision makers think
about implementation issues when choosing strategies and as they think about possible changes to the
organisation’s strategies while implementing a currently chosen strategy.
In Part 2 of this book, we discuss the different strategies organisations may choose to use. First,
we examine business-level strategies (Chapter 4). A business-level strategy describes the actions an
organisation takes to exploit its competitive advantage over rivals. A company competing in a single
product market (e.g. a locally owned grocery store operating in only one location) has one business-level
strategy, while a diversified organisation competing in multiple product markets forms a business-level
strategy for each of its businesses. In Chapter 5, we describe the actions and reactions that occur among
organisations in marketplace competition. Competitors typically respond to and try to anticipate each
other’s actions. The dynamics of competition affect the strategies organisations choose, as well as how
they try to implement the chosen strategies.19
For the diversified organisation, corporate-level strategy (Chapter 6) is concerned with determining
the businesses in which the company intends to compete as well as how to manage its different businesses.
Other topics vital to strategy formulation, particularly in the diversified company, include acquiring other
businesses and, as appropriate, restructuring the organisation’s portfolio of businesses (Chapter 7) and
selecting an international strategy (Chapter 8). With cooperative strategies (Chapter 9), organisations
form a partnership to share their resources and capabilities in order to develop a competitive advantage.
Cooperative strategies are becoming increasingly important as organisations seek ways to compete in the
global economy’s array of different markets. 20
To examine actions taken to implement strategies, we consider several topics in Part 3. First, we
examine the different mechanisms used to govern organisations (Chapter 10). With demands for
improved corporate governance being voiced by many stakeholders in the current business environment,
organisations are challenged to learn how to simultaneously satisfy their stakeholders’ different
interests. 21 Finally, the organisational structure and actions needed to control an organisation’s operations
(Chapter 11), the patterns of strategic leadership appropriate for today’s organisations and competitive
environments (Chapter 12), and strategic entrepreneurship (Chapter 13) as a path to continuous innovation
are addressed.

The competitive landscape

The fundamental nature of competition in many of the world’s industries is changing. The reality is that
financial capital continues to be scarce and markets are increasingly volatile. 22 Because of this, the pace
of change is relentless and ever-increasing. Even determining the boundaries of an industry has become
challenging.
Managers must adopt a new mindset that values flexibility, speed, innovation, integration and the
challenges that evolve from constantly changing conditions. 23 The conditions of the competitive landscape
result in a perilous business world, one in which the investments that are required to compete on a global
scale are enormous and the consequences of failure are severe. 24 Effective use of the strategic management
process reduces the likelihood of failure for organisations as they encounter the conditions of today’s
competitive landscape.
Hypercompetition is a term often used to capture the realities of the competitive landscape. Under hypercompetition
conditions of hypercompetition, assumptions of market stability are replaced by notions of inherent a condition where
instability and change. 25 Hypercompetition results from the dynamics of strategic manoeuvring among competitors engage
in intense rivalry,
global and innovative combatants. In a hypercompetitive market, organisations often aggressively markets change
challenge their competitors in the hopes of improving their competitive position and, ultimately, their quickly and often, and
performance. 26 In recent years, internet giant Tencent Holdings Ltd of China has become one of the world’s entry barriers are low
largest technology investors. Between 2013 and mid-2018, the organisation took stakes in 277 start-ups.
Analysts believe this is a calculated strategy to crowd out rivals and to increase profits. 27
8 PART 1: STRATEGIC MANAGEMENT INPUTS

Several factors create hypercompetitive environments and influence the nature of the competitive
landscape. The emergence of a global economy and technology – specifically rapid technological change –
have been the two primary drivers of hypercompetitive environments and the nature of today’s competitive
landscape.

The global economy

A global economy is one in which goods, services, people, skills and ideas move freely across geographic
borders. Relatively unfettered by artificial constraints, such as tariffs, the global economy significantly
expands and complicates an organisation’s competitive environment. 28 The global economy is under
pressure, weighed down by trade tensions, inequality and geopolitical uncertainty. The world is at an
economic ‘tipping point’ according to the 2019 Global Competiveness Report ‘amid a backlash against
capitalism and globalization’. 29
Interesting opportunities and challenges are associated with the emergence of the global economy. 30 For
example, the European Union (EU; composed of 27 countries after the UK exited the EU in 2020) has become
one of the world’s largest markets, with 700 million potential customers, while China has rapidly become
a huge market that was pursued by many organisations prior to the Covid-19 pandemic. Notwithstanding,
China remains an extremely competitive market in which local market-seeking multinational corporations
(MNCs) must fiercely compete against other MNCs, as well as against those local companies that are more
cost-effective and faster in product development. While China has been viewed as a country from which
to source low-cost goods, many MNCs, such as Procter & Gamble (P&G), are actually net exporters of local
management talent; they have been dispatching more Chinese abroad than bringing foreign expatriates
to China. 31
The size of parts of the global economy is an important aspect of studying this competitive landscape.
In 2019, for example, the USA was the world’s largest economy at a value of US$21 trillion. It accounts for
approximately 20 per cent of global output; the economy is still larger than that of China; 32 and the services
sectors in the USA are technologically sophisticated. China is the world’s second-largest economy, with a
nominal gross domestic product (GDP) value of US$9.2 trillion, while Japan in 2019 was ranked the third-
largest global economy at US$5.2 trillion. Following Japan were Germany at US$4.2 trillion and the UK at
US$3.2 trillion. These were closely followed by India, which overtook the French economy in 2018, and
looks set to move into fifth position in 2021–22. In observing economies’ values in 2018, the World Economic
Forum noted that the size of the USA’s economy was ‘larger than the combined economies of numbers four
to 10 on the list. Overall, the global economy (was) worth an estimated $79.98 trillion, meaning the United
States in 2018 accounted for more than one-quarter of the world total’. 33 Thus, organisations scanning the
global economy for opportunities in 2021 might conclude that markets in the USA, China and Japan yield
potentially significant opportunities for them.
Of course, such an analysis also must consider entry barriers to various economies in the form of tariffs.
This type of analysis must also be forward-looking in that the World Economic Forum has estimated that the
economies of China and India would exceed the size of the US economy by 2050 and that the economies of
Germany, the UK and France would decline in size by this time as well. Organisations should study carefully
future forecasts when determining the parts of the world in which growth opportunities, as well as threats
to their competitive global positions, may exist in the next decade. US-based Netflix, for example, studies
the global economy to identify opportunities in countries and regions in which it may grow. In mid-2018,
Netflix continued adding subscribers, reaching 125 million globally. Analysts predicted the organisation
would have 360 million subscribers by 2030, and that international markets would be the source of much
of the growth in subscribers. 34 Informing this prediction was the expectation that Netflix would achieve
reasonable levels of market penetration internationally, including reaching penetration in 35 per cent of
all broadband households worldwide, excluding China. 35 In 2018 alone, the organisation allocated $8 billion
to develop original programming, with some of those programs targeted to international customers. 36
Netflix was one of the rare organisations that continued to grow during the Covid-19 pandemic, adding
 CHAPTER 1 9
Strategic management and strategic competitiveness

15.8 million subscribers between March and April 2020, more than double the amount that was predicted
and representing a huge growth of over 22 per cent during the 12-month period to 2020. Netflix also saw a
quarterly revenue of US$5.76 billion in 2020. 37 According to market research organisation HarrisX, Netflix
is a long way ahead of its competitors; however, the organisation is mindful that there are challenges
ahead, as noted in a recent article: ‘when you’re number one, it’s always difficult to grow as fast as your
competitors or whoever’s trailing you’. 38
India, one of the world’s largest democracies, has an economy that also is growing rapidly and now
ranks as the fifth largest in the world, and it has a very fast-growing population. 39 Simultaneously, many
organisations in emerging economies are moving into international markets and are now regarded as
multinational organisations. Barriers to entering foreign markets still exist. The statistics detailing the
nature of the global economy reflect the realities of a hypercompetitive business environment and challenge
individual organisations to think seriously about the markets in which they will compete; the case of
Netflix is a good example.

Starbucks is a new economy multinational yet has Strategic focus | Globalisation

had failures in key markets
Starbucks is not an ordinary supplier of a cup of coffee.
It is a large and innovative multinational organisation
that engages in major strategic actions to enter new
international and product markets (e.g. acquisitions).
It is a multibillion-dollar organisation with many stores
operating in multiple countries. Starbucks surpassed its
goal set to have at least 12 500 stores in the USA by 2015
to 15 149 US locations in 2020. Starbucks was the largest
global coffeehouse company in 2019 with 31 256 stores
across the globe. Starbucks has become a major player
in Asian markets, which is interesting because it took on
a largely ingrained tea-drinking culture. Starbucks had
1026 stores operating in China in 2015, 1540 in 2017
(which was the expected store numbers for 2015), and in
2019 there were 4123 Starbuck stores in China, with 629
newly opened stores and 27 closures – a major increase
over its 3000 stores since 2015. Starbucks adapted to
local market tastes by developing larger stores where, for
example, people can lounge and meet with friends. It has
products that cater to tea drinkers as well. China ranked
second in front of Japan, which had a total of 1286
locations in 2019, and Starbucks generated more than
US$16 billion in the region.
Starbucks has also entered Vietnam and India with
high expectations. In 2013 it opened its first store
in Vietnam, although in 2019 it had only 46 stores
there. Interestingly, Vietnam is the second-largest
producer of coffee beans in the world, behind Brazil.
Starbucks works with local Vietnamese farmers to grow
ah ­ igh-quality Arabica coffee bean. In partnership with
the Tata Group, Starbucks also opened its first stores in
India, with plans to expand rapidly there, and in 2019 it
had 132 stores in India, three times that of Vietnam.
In contrast, in Australia the scorecard has been
extremely poor. CNBC reported that while the
Australian café industry was expected to reach more
than A$6 billion in revenue in 2018, in its first seven
years in Australia, Starbucks accumulated A$105
million in losses and 61 locations were forced to close.
Starbucks referred to its efforts in the country as a ‘huge
flop’. Starbucks entered the market hard in 2000 and
had 84 stores at its peak. The problems were obvious
from the start. The organisation charged more than
competitors, had stores in low-traffic locations and,
basically, the well-established coffee culture of Australia
was better than the Starbucks offerings. Melbourne-
style coffee is arguably the world’s best and Starbucks
could not compete on taste in an already thriving coffee
culture, which proved to be a huge challenge for the
US brand. Starbucks has not given up just yet, and in
2021 there were 55 locations (more than Vietnam) in
Australia. With slow growth forecasts into the future, its
Australian goal is to focus more on international tourists
that recognise this global brand.
The experience of Starbucks in Europe has been
more mixed. It has had some success, but has also
encountered another different set of coffee cultures.
At first, it tried to encourage Europeans to adapt
to the Starbucks approach, but this strategy failed.
Now, because of the importance Starbucks places on
10 PART 1: STRATEGIC MANAGEMENT INPUTS

its future in Europe, the company is adapting to the
European café culture. This means that Starbucks is
building larger stores with additional seating to allow
people to meet and spend time in its stores, as it
has done in Asia. It has implemented other practices
and products that adapt even more to local (country)
cultures and tastes (e.g. in France and England).
In addition to Starbucks’ international thrust, it
also engages in significant innovation and strategic
actions to add to its product line. In recent years, it
has introduced Via, an instant coffee, and a single-
cup coffee maker (named the Verismo) that allows
customers to make their own lattes at home. Another
attempt to add to its product line was evidenced by
its acquisition of the tea chain Teavana. In fact, it paid
US$620 million to acquire the Atlanta-based company.
In recent times, it also acquired a juice maker, Evolution
Fresh, and Bay Bread, the operator of La Boulange
bakeries. Starbucks’ variety of beverage and food
companies now includes: Seattle’s Best Coffee, Teavana,
Tazo, Evolution Fresh, Torrefazione Italia Coffee and
Ethos Water.
Sources: S. Lock, 2019, Starbucks stores:
US and international 2005 to 2019, http://www.statista.com;
http://www.financesonline.com, Number of Starbucks
worldwide 2020: facts, statistics, and trends;
L. L. Thomala, 2020, Number of Starbucks stores in China from 2005 to
2019, Statista.com, 27 May; L. MacLellan, 2019, The countries with the
most Starbucks locations, Quartz, http://www.qz.com, 30 January; A.
Turner, 2018, Why there are almost no Starbucks in Australia, CNBC,
http://www.cnbc.com, 25 July; J. Gertner, 2013, For infusing a steady
stream of new ideas to revive its business, Fast Company, http://www.
fastcompany.com; A. Gasparro, 2013, Starbucks enjoys sales jolt from
its US, China stores, Wall Street Journal, http://www.wsj.com, 24 January;
J. Noble, 2013, Starbucks takes on Vietnam coffee culture, Financial
Times, http://www.ft.com, 3 January; A. Gasparro, 2012, Starbucks:
China to become no. 2 market, Wall Street Journal, http://www.wsj.com,
6 December; 2012, A look at Starbucks’ U.S. presence over the years,
Bloomberg Businessweek, http://www.businessweek.com, 5 December; L.
Burkitt, 2012, Starbucks plays to local Chinese tastes, Wall Street Journal,
http://www.wsj.com, 26 November; J. Jargon, 2012, Starbucks CEO: ‘We
will do for tea what we did for coffee’, Wall Street Journal, http://www.
wsj.com, 14 November; V. Bajaj, 2012, Starbucks opens in India with
pomp and tempered ambition, New York Times, http://www.nytimes.
com, 19 October; S. Strom, 2012, Starbucks to introduce single-serve
coffee maker, New York Times, http://www.nytimes.com, 20 September;
L. Alderman, 2012, In Europe, Starbucks adjusts to a café culture, New
York Times, http://www.nytimes.com, 30 March.

The march of globalisation

Globalisation is the increasing economic interdependence among countries and their organisations as
reflected in the flow of goods and services, financial capital and knowledge across country borders.40
Globalisation is a product of a large number of organisations competing against one another in an increasing
number of global economies.
In globalised markets and industries, financial capital might be obtained in one national market and used
to buy raw materials in another. Manufacturing equipment bought from a third national market can then
be used to produce products that are sold in yet a fourth market. Thus, globalisation increases the range of
opportunities for companies competing in the current competitive landscape.41 Organisations operating
globally must make culturally sensitive decisions when using the strategic management process,42 as
evidenced in Starbucks’ operations in European and Asian countries. Additionally, highly globalised
organisations should anticipate ever-increasing complexity in their operations as goods, services and people
move freely across geographic borders and throughout different economies.
Overall, it is important to note that globalisation has led to higher performance standards in many
competitive dimensions, including those of quality, cost, productivity, product introduction time and
operational efficiency. In addition to organisations competing in the global economy, these standards
affect organisations competing on a domestic-only basis. The reason is that customers will purchase
from a global competitor rather than a domestic organisation when the global company’s good or service
is superior. Because workers now flow rather freely among global economies, and because employees are
a key source of competitive advantage, organisations must understand that, increasingly, ‘the best people
will come from … anywhere’.43 Thus, managers have to learn how to operate effectively in a ‘multi-polar’
world, with many important countries having unique interests and environments.44 Organisations must
learn how to deal with the reality that, in the competitive landscape of the 21st century, only companies
 CHAPTER 1 11
Strategic management and strategic competitiveness

capable of meeting, if not exceeding, global standards typically have the capability to earn above-average
returns.
Although globalisation offers potential benefits to organisations, it is not without risks. Collectively,
the risks of participating outside of an organisation’s domestic country in the global economy are labelled
a ‘liability of foreignness’.45
The increasing opportunities available in emerging economies is a major driver of growth in the size
of the global economy. Important emerging economies include the BRIC countries (Brazil, Russia, India
and China),46 the VISTA countries (Vietnam, Indonesia, South Africa, Turkey and Argentina),47 as well as
Mexico and Thailand. Demonstrating the growth in size of some of these economies was the 2018 prediction
that, by 2050, Indonesia, Brazil, Russia and Mexico would be the fourth-, fifth-, sixth- and seventh-largest
economies in the world by size, respectively. If this were to happen, by 2050 the size of these emerging
economies would exceed those of Japan, Germany, the UK and France.48 Emerging economy organisations
now compete in global markets, some with increasing success. 49 Indeed, the emergence of MNCs in
international markets forces large MNCs based in developed markets to enrich their own capabilities to
compete effectively in global markets. 50
One risk of entering the global market is the amount of time typically required for organisations to
learn how to compete in markets that are new to them. An organisation’s performance can suffer until
this knowledge is either developed locally or transferred from the home market to the newly established
global location. 51 Additionally, an organisation’s performance may suffer with substantial amounts of
globalisation. In this instance, an organisation may over-diversify internationally and this may have
strong negative effects on overall performance.
Thus, entry into international markets, even for organisations with substantial experience in the global
economy, requires effective use of the strategic management process. It is also important to note that even
though global markets are an attractive strategic option for some companies, they are not the only source
of strategic competitiveness. In fact, for most organisations – even those capable of competing successfully
in global markets – it is critical to remain committed to and strategically competitive in both domestic
and international markets by staying attuned to technological opportunities and potential competitive
disruptions that innovations create. 52 The challenge is also to be responsive to local needs, something
Starbucks failed to do in Australia. Starbucks is now emphasising both product innovation and international
expansion as means of growing profitably.

Technology and technological changes

Boston Consulting Group analysts describe the impact of technology as follows: ‘No company can afford
to ignore the impact of technology on everything from supply chains to customer engagement, and the
advent of even more advanced technologies, such as artificial intelligence (AI) and the Internet of Things,
portends more far-reaching change.’53 There are three categories of technology-related trends and conditions
affecting today’s organisations: technology diffusion and disruptive technologies; the information age; and
increasing knowledge intensity. These categories have a significant effect on the nature of competition in
many industries.

Technology diffusion and disruptive technologies

The rate of technology diffusion, which is the speed at which new technologies become available and are
used, has increased substantially over the past 15 to 20 years. Consider the following rates of technology
diffusion:

It took the telephone 35 years to get into 25 per cent of all homes in the United States. It
took TV 26 years. It took radio 22 years. It took PCs 16 years. It took the internet 7 years.54
12 PART 1: STRATEGIC MANAGEMENT INPUTS

The impact of technological changes on organisations and industries is broad and significant. For
example, in the not-too-distant past, people rented movies on videotapes from global retail stores such as
Blockbuster. Blockbuster has just one store that remains open globally, located in Oregon, USA. Fifteen years
earlier there were 9000 stores. Today, customers on a global basis use electronic means almost exclusively
to rent movies (such as via Foxtel) and games (e.g. Fortnite). The publishing industry (books, journals,
magazines and newspapers) is moving rapidly from hard copy to electronic formats. Many organisations in
these industries, operating with a more traditional business model, are suffering. These changes are also
affecting other industries, from trucking to mail services.
Perpetual innovation is a term used to describe how rapidly and consistently new, information-
intensive technologies replace older ones. The shorter product life cycles resulting from the rapid
diffusion of new technologies place a competitive premium on being able to quickly introduce new,
innovative goods and services into the marketplace. 55
In fact, when products become somewhat indistinguishable because of the widespread and rapid
diffusion of technologies, speed to market with innovative products may be the primary source of
competitive advantage (see Chapter 5). 56 Indeed, some argue that the global economy is increasingly
driven by, or revolves around, constant innovations. Not surprisingly, such innovations must be derived
from an understanding of global standards and expectations of product functionality. 57 Although some
argue that large established organisations may have trouble innovating, evidence suggests that today
these organisations are developing radically new technologies that transform old industries or create new
ones. 58 Apple is an excellent example of a large established organisation capable of radical innovation.
Also, in order to diffuse the technology and enhance the value of an innovation, additional organisations
need to be innovative in their use of the new technology, building it into their products. 59 Although
mature organisations may have trouble innovating, evidence suggests that today these organisations
are developing radically new technologies that transform old industries or create new ones.60 In 2018, for
example, Boston Consulting Group identified the 50 most innovative companies in the world. The first five
organisations on this list are large companies: Apple, Google, Microsoft, Amazon and Samsung.61 Wireless
AirPods, ARKit (the organisation’s augmented-reality framework) and HomePod (an intelligent speaker)
are some of the innovative products Apple has introduced and for which some recognise it as the most
innovative company in the world.62
Another indicator of rapid technology diffusion is that it now may take only 12 to 18 months for
organisations to gather information about their competitors’ research and development and product
decisions. 63 In the global economy, competitors can sometimes imitate an organisation’s successful
competitive actions within a few days. In this sense, the rate of technological diffusion has reduced the
competitive benefits of patents. Today, patents may be an effective way of protecting proprietary technology
in a small number of industries such as pharmaceuticals. Indeed, many organisations competing in the
electronics industry often do not apply for patents, in order to prevent competitors from gaining access to
the technological knowledge included in the patent application.
Disruptive technologies – technologies that destroy the value of an existing technology and create
new markets 64 – surface frequently in today’s competitive markets. Think of the new markets created by
the technologies underlying the development of products such as the iPad and AirPods. These types of
products are thought by some to represent radical or breakthrough innovations. 65 (We talk more about
radical innovations in Chapter 13.) A disruptive or radical technology can create what is essentially a new
industry or it can harm industry incumbents. However, some incumbents are able to adapt due to their
superior resources, experience and ability to gain access to the new technology through multiple sources
(e.g. alliances, acquisitions and ongoing internal research).66 Clearly, Apple has developed and introduced
‘disruptive technologies’ such as the iPad and AirPods, and in so doing changed several industries. For
example, the iPod and its complementary iTunes have revolutionised how music is sold to, and used by,
consumers. In conjunction with other complementary and competitive products (e.g. Amazon’s Kindle),
 CHAPTER 1 13
Strategic management and strategic competitiveness

the iPad has contributed to and sped up major changes in the publishing industry, which, as noted earlier, is
moving more and more from hard copies to electronic books. Apple’s new technologies and products are also
contributing to the new ‘information age’. Thus, Apple provides an example of entrepreneurship through
technology emergence across multiple industries.67

The information age

Dramatic changes in information technology have occurred in recent years. Personal computers, mobile
phones, artificial intelligence, virtual reality, massive databases and multiple social networking sites are
only a few examples of how information is used differently as a result of technological developments.
An important outcome of these changes is that the ability to effectively and efficiently access and
use information has become an important source of competitive advantage in virtually all industries.
Information technology advances have given small organisations more flexibility in competing with large
organisations, if that technology can be efficiently used.68
Data and information are vital to organisations’ efforts to understand customers and their needs and
to implement strategies that satisfy those needs as well as the interests of all other stakeholders. For
today’s organisations in virtually all industries, information technology is an important capability that
contributes positively to product innovation efforts and may be a source of competitive advantage as well.
Organisations failing to harness the power of data and information are disadvantaged compared to their
competitors.69 Both the pace of change in information technology and its diffusion continue to increase
on a global scale. In 2018, 36 per cent of the world’s population owned a smartphone. While expectations
are that the number of personal computers (PCs) sold annually will decline, from 258.8 million in 2017
to 215.8 million in 2023, conversely, technology innovations, such as touch-enabled PCs, ultra-slim and
convertible laptops, and hybrid machines, will stimulate revenue growth among technology companies.70
Technology-based innovations also stimulate additional markets. For example, predictions are that the
global video streaming market will reach US$70 billion by 2021. Contributing to this market’s growth is
the fact that in 2018, the percentage of internet and mobile audiences watching live video continued to
expand.71 Trends such as these inform the work that organisations complete to select and implement their
strategies in the global economy. The most successful organisations envision information ­technology­
derived innovations as opportunities to identify and serve new markets rather than as threats to the
markets they serve currently.72
Both the pace of change in information technology and its diffusion will continue to increase. For
instance, the number of personal computers in use globally was recently expected to surpass 2.3 billion.73
The declining costs of information technologies and the increased access to them are also evident in the
current competitive landscape. The global proliferation of relatively inexpensive computing power and its
linkage on a global scale via computer networks combine to increase the speed and diffusion of information
technologies. Thus, the competitive potential of information technologies is now available to companies
of all sizes throughout the world, including those in emerging economies.74
The internet is another technological innovation contributing to hypercompetition. Available to an
increasing number of people throughout the world, the internet provides an infrastructure that allows
the delivery of information to computers in any location. Access to the internet on smaller devices such
as smartphones is having an ever-growing impact on competition in a number of industries. However,
possible changes to the pricing structures of internet service providers (ISPs) could affect the rate of
growth of internet-based applications. Users downloading or streaming high-definition films, playing
video games online and so forth would be affected the most if ISPs were to base pricing structures around
total usage.
 14 PART 1: STRATEGIC MANAGEMENT INPUTS

Strategic focus |Technology The core of Apple: technology and innovation

Apple has transformed industries with the introduction
of new products such as the iPod, iPad, iPhone, Apple
Watch and AirPods. The extent of its dominance of
the smartphone industry is hard to comprehend:
around 1000 companies make smartphones but just
one makes most of the profits in this industry. In 2019,
Apple announced that its revenue totalled US$260
billion for the 2019 financial year. How? It commands
higher prices, does not sell products cheap and never
appears to discount its products, ever. Samsung is the
other profit maker in this highly competitive industry
and it sells many more units than Apple. Going back to
2012, industry profits were 50–50 between Apple and
Samsung, but no longer.
This dominance and good performances from other
arms of the Apple empire have yielded huge profits.
Apple has achieved phenomenal success with
the introduction of innovative products and brand
maintenance. The late Steve Jobs was selected by
Fortune magazine as the CEO of the first decade of the
21st century, based on the fact that Apple under his
leadership had transformed four industries, three of them
in a decade. In addition, in 2020 Fast Company named
Apple in the World’s Most Innovative Companies list.
Apple is one of the top companies in the world based on
almost any criterion or set of criteria used. Because of
this, Apple is perceived exceptionally well by customers.
Apple’s growth rate has been extraordinary and its
financial performance even more impressive. And the
appeal of Apple’s products is global. For example, Apple’s
iPhones now exceed 925 million units globally. Apple also
disclosed that there were 1.4 billion active devices as of
January 2019.
Apple retail stores enjoy a steady flow of traffic each day. More
remarkable is that Apple’s stores in China handled in excess of
40 000 people daily prior to the Covid-19 pandemic. Apple has
opened 510 retail stores across 25 countries, with 271 located
in the United States alone. Apple’s newest locations include:
Kawasaki and Tokyo, Japan; Mexico City; Singapore Airport;
and Taipei, Taiwan.
Source: Newspix/Alan Pryke
Although there are many reasons for its success,
the primary reasons rest with Apple’s new technology
development and innovative new products.
Sources: MacRumors Staff, 2020, Keep track of Apple’s retail stores
worldwide, http://www.macrumors.com, 12 May; Above Avalon, 2019,
http://www.aboveavalon.com, 30 May; Fortune, 2011, World’s most
admired companies, http://www.fortune.com, 3 March; B. Worthen,
2011, With new iPad, Apple tries to stay ahead of wave of tablet rivals,
Wall Street Journal, http://www.online.wsj.com, 3 March; G. A. Fowler &
N. Wingfield, 2011, Apple’s showman takes the stage, Wall Street Journal,
http://www.online.wsj.com, 3 March; Financial Times, 2011, Apple and
the tablets, http://www.ft.com, 1 March; N. Louth, 2011, Finding value in
Apple’s core, Financial Times, http://www.ft.com, 25 February; M. Helft,
2011, After iPad’s head start, rival tablets are poised to flood offices,
New York Times, http://www.nytimes.com, 20 February; L. Chao, 2011,
New Shanghai Apple store will be biggest in China, Wall Street Journal,
http://www.online.wsj.com, 18 February.

STRATEGY NOW Increasing knowledge intensity

Apple’s drive to Knowledge (information, intelligence and expertise) is the basis of technology and its application. In
innovate the competitive landscape of the 21st century, knowledge is a critical organisational resource and an
increasingly valuable source of competitive advantage.75
Indeed, starting in the 1980s, the basis of competition shifted from hard assets to intangible resources;
for example, ‘Walmart transformed retailing through its proprietary approach to supply chain management
and its information rich relationships with customers and suppliers’.76 Relationships with customers and
suppliers are an example of an intangible resource.
Knowledge is gained through experience, observation and inference, and is an intangible resource.
The value of intangible resources, including knowledge, is growing as a proportion of total shareholder
 CHAPTER 1 15
Strategic management and strategic competitiveness

value in today’s competitive landscape.77 In fact, the Brookings Institution estimates that intangible
resources contribute approximately 85 per cent of that value.78 The probability of achieving strategic
competitiveness is enhanced for the organisation that develops the ability to capture intelligence,
transform it into useable knowledge and diffuse it rapidly throughout the company.79 Therefore,
organisations must develop (e.g. through training programs) and acquire (e.g. by hiring educated and
experienced employees) knowledge, integrate it into the organisation to create capabilities, and then
apply it to gain a competitive advantage. 80
A strong knowledge base is necessary to create innovations. Organisations lacking the appropriate
strategic flexibility
internal knowledge resources are less likely to invest money in research and development. 81 Organisations
a set of capabilities
must continue to learn (building their knowledge stock) because knowledge spillovers to competitors are used to respond to
common. There are several ways in which knowledge spillovers occur, including the hiring of professional various demands and
staff and managers by competitors. 82 Because of the potential for spillovers, organisations must move opportunities existing
in a dynamic and
quickly to use their knowledge in productive ways. In addition, organisations must build routines that uncertain competitive
facilitate the diffusion of local knowledge throughout the organisation for use everywhere that it has environment
value. 83 Organisations are better able to do these things when they have
strategic flexibility.
Strategic flexibility is a set of capabilities used to respond to various
demands and opportunities existing in a dynamic and uncertain competitive
environment. Thus, strategic flexibility involves coping with uncertainty
and its accompanying risks. 84 Organisations should try to develop strategic
flexibility in all areas of their operations. However, those working within
organisations to develop strategic flexibility should understand that the
task is not easy, largely because of inertia that can build up over time. An
organisation’s focus and past core competencies may actually slow the rate
of change and its aptitude for strategic flexibility. 85
To be strategically f lexible on a continuing basis, and to gain the
competitive benefits of such flexibility, an organisation has to develop the
capacity to learn. Continuous learning provides the organisation with new and
up-to-date skill sets that allow it to adapt to its environment as it encounters The pricing landscape of ISPs evolves based upon the
advent of streaming video and the increased use of
changes. 86 Organisations capable of rapidly and broadly applying what they
iPads and other tablet and mobile devices.
have learned exhibit the strategic flexibility and the capacity to change in
ways that will increase the probability of successfully dealing with uncertain,
Source: iStockphoto/hocus-focus

hypercompetitive environments.

The I/O model of above-average returns

The external environment has been viewed historically as the primary determinant of strategies that
organisations selected to be successful. 87 In addition, leading organisations believe that the external
environment rather than the internal organisation is the strongest influence on the choice of strategy. The
industrial organisation model of above-average returns explains the external environment’s dominant
influence on an organisation’s strategic actions. The model specifies that the industry, or segment of an
industry, in which a company chooses to compete has a stronger influence on performance than do the
choices managers make inside their organisations. 88 The organisation’s performance is believed to be
determined primarily by a range of industry properties, including economies of scale, barriers to market
entry, diversification, product differentiation and the degree of concentration of organisations in the
industry. 89 We examine these industry characteristics in Chapter 2.
Grounded in economics, the I/O model has four underlying assumptions. First, the external
environment is assumed to impose pressures and constraints that determine the strategies that would
result in above-average returns. Second, most organisations competing within an industry or within a
16 PART 1: STRATEGIC MANAGEMENT INPUTS

segment of that industry are assumed to control similar strategically relevant resources and to pursue
similar strategies in light of those resources. Third, resources used to implement strategies are assumed
to be highly mobile across organisations, so any resource differences that might develop between
organisations will be short-lived. Fourth, organisational decision makers are assumed to be rational and
committed to acting in the organisation’s best interests, as shown by their profit-maximising behaviours. 90
The I/O model challenges organisations to find the most attractive industry in which to compete. Because
most organisations are assumed to have similar valuable resources that are mobile across companies,
their performance generally can be increased only when they operate in the industry with the highest
profit potential and learn how to use their resources to implement the strategy required by the industry’s
structural characteristics. 91
The five forces model of competition is an analytical tool used to assist organisations find the industry
that is the most attractive for them. The model (explained in Chapter 2) encompasses several variables and
tries to capture the complexity of competition. The five forces model suggests that an industry’s profitability
(i.e. its rate of return on invested capital relative to its cost of capital) is a function of interactions among
five forces: suppliers, buyers, competitive rivalry among organisations currently in the industry, product
substitutes, and potential entrants to the industry. 92
Organisations use the five forces model to identify the attractiveness of an industry (as measured by
its profitability potential) as well as the most advantageous position for the organisation to take in that
industry, given the industry’s structural characteristics. 93 Typically, the model suggests that organisations
may earn above-average returns by producing either standardised goods or services at costs below those
of competitors (a cost leadership strategy) or by producing differentiated goods or services for which
customers are willing to pay a price premium (a differentiation strategy). (Cost leadership and product
differentiation strategies are discussed in Chapter 4.) Operating in an unattractive industry does not
mean profits cannot be made. The fact that ‘the fast food industry is becoming a “zero-sum industry” as
companies battle for the same pool of customers’ 94 suggests that fast-food giant McDonald’s is competing
in a relatively unattractive industry. However, by focusing on product innovations and enhancing existing
facilities while buying properties in different global markets at attractive prices to selectively build new
stores, McDonald’s is positioned in the fast-food (or quick-service) restaurant industry to earn above-
average returns. There may be bumps in the road of profit, but McDonald’s has demonstrated that it can
change and succeed.
As shown in Figure 1.2, the I/O model suggests that above-average returns are earned when
organisations are able to effectively study the external environment as the foundation for identifying
an attractive industry and implementing the appropriate strategy. For example, in some industries,
organisations can reduce competitive rivalry and erect barriers to entry by forming joint ventures. Because
of these outcomes, the joint ventures increase profitability in the industry. 95 Companies that develop or
acquire the internal skills needed to implement strategies required by the external environment are likely to
succeed, while those that do not are likely to fail. 96 Hence, this model suggests that returns are determined
primarily by external characteristics rather than by the organisation’s unique internal resources and
capabilities.
Research findings support the I/O model in that approximately 20 per cent of an organisation’s
profitability is explained by the industry in which it chooses to compete. However, this research also shows
that 36 per cent of the variance in profitability can be attributed to the organisation’s characteristics
and actions. 97 These findings suggest that the external environment and an organisation’s resources,
capabilities, core competencies and competitive advantages (see Chapter 3) influence its ability to achieve
strategic competitiveness and earn above-average returns.
As shown in Figure 1.2, the I/O model assumes that an organisation’s strategy is a set of commitments
and actions flowing from the characteristics of the industry in which it has decided to compete.
The resource-based model, discussed next, takes a different view of the major influences on an
organisation’s choice of strategy.
 CHAPTER 1 17
Strategic management and strategic competitiveness

Figure 1.2 The I/O model of above-average returns

1 Study the external environment,
The external environment
especially the industry environment.
• The general environment
• The industry environment
• The competitor environment

2 Locate an industry with high potential

An attractive industry
for above-average returns.
An industry whose structural characteristics suggest
above-average returns

3 Identify the strategy called for by the

Strategy formulation
attractive industry to earn
Selection of a strategy linked with above-average
above-average returns.
returns in a particular industry

4 Develop or acquire assets and skills Assets and skills

needed to implement the strategy.
Assets and skills required to implement a chosen strategy

5 Use the organisation’s strength

Strategy implementation
(its developed or acquired assets
Selection of strategic actions linked with effective
and skills) to implement the strategy.
implementation of the chosen strategy

Superior returns
Earning of above-average returns

resources

The resource-based model of above-average inputs into an

organisation’s
production process,
returns such as capital
equipment, the
The resource-based model assumes that each organisation is a collection of unique resources and skills of individual
employees, patents,
capabilities. The uniqueness of its resources and capabilities is the basis of an organisation’s strategy and finances and talented
its ability to earn above-average returns. 98 managers
Resources are inputs into an organisation’s production process, such as capital equipment, the skills
capability
of individual employees, patents, finances and talented managers. In general, an organisation’s resources the capacity for a
are classified into three categories: physical, human and organisational capital. Described fully in Chapter set of resources
3, resources are either tangible or intangible in nature. to perform a task
or an activity in an
Individual resources alone may not yield a competitive advantage. 99 In fact, resources have a integrative manner
greater likelihood of being a source of competitive advantage when they are formed into a capability. A core competencies
capability is the capacity for a set of resources to perform a task or an activity in an integrative manner. capabilities that
Capabilities evolve over time and must be managed dynamically in pursuit of above-average returns.100 serve as a source of
Core competencies are resources and capabilities that serve as a source of competitive advantage for an competitive advantage
for an organisation
organisation over its rivals. Core competencies are often visible in the form of organisational functions. over its rivals
18 PART 1: STRATEGIC MANAGEMENT INPUTS

For example, Apple’s R&D function is one of its core competencies. Amazon’s distribution function is also
considered a core competency. There is little doubt that the ability to produce innovative new products
that are perceived as valuable in the marketplace is a core competence for Apple, as suggested in the earlier
‘Strategic focus’ feature.
According to the resource-based model, differences in an organisation’s performances across time are due
primarily to its unique resources and capabilities rather than the industry’s structural characteristics. This
model also assumes that an organisation acquires different resources and develops unique capabilities based
on how it combines and uses the resources; that resources and certain capabilities are not highly mobile
across organisations; and that the differences in resources and capabilities are the basis of competitive
advantage.101 Through continued use, capabilities become stronger and more difficult for competitors to
understand and imitate. As a source of competitive advantage, a capability ‘should be neither so simple
that it is highly imitable, nor so complex that it defies internal steering and control’.102
The resource-based model of superior returns is shown in Figure 1.3. This model suggests that the
strategy the organisation chooses should allow it to use its competitive advantages in an attractive industry
(the I/O model is used to identify an attractive industry).

Figure 1.3 The resource-based model of above average returns

1 Identify the organisation’s resources. Study its
Resources
strengths and weaknesses compared with
Inputs into an organisation’s production process
those of competitors.

2 Determine the organisation’s capabilities.

Capability
What do the capabilities allow the organisation
Capacity of an integrated set of resources to integratively
to do better than its competitors?
perform a task or activity

3 Determine the potential of the organisation’s

Competitive advantage
resources and capabilities in terms
Ability of an organisation to outperform its rivals
of a competitive advantage.

4 Locate an attractive industry.

An attractive industry
An industry with opportunities that can be exploited by
the organisation’s resources and capabilities

5 Select a strategy that best allows the

Strategy formulation and implementation
organisation to utilise its resources and
capabilities relative to opportunities in the Strategic actions taken to earn above-average returns
external environment.

Superior returns
Earning of above-average returns

Not all of an organisation’s resources and capabilities have the potential to be the foundation for a
competitive advantage. This potential is realised when resources and capabilities are valuable, rare,
costly to imitate and non-substitutable.103 Resources are valuable when they allow an organisation to take
advantage of opportunities or neutralise threats in its external environment. They are rare when possessed
 CHAPTER 1 19
Strategic management and strategic competitiveness

by few (if any) current and potential competitors. Resources are costly to imitate when other organisations
either cannot obtain them or are at a cost disadvantage in obtaining them compared with the organisation
that already possesses them. And they are non-substitutable when they have no structural equivalents.
Many resources can either be imitated or substituted over time. Therefore, it is difficult to achieve and
sustain a competitive advantage based on resources alone.104 Individual resources are often integrated to
produce integrated configurations in order to build capabilities. These capabilities are more likely to have
these four attributes.105 When these four criteria are met, however, resources and capabilities become core
competencies.
As noted previously, research shows that both the industry environment and an organisation’s
internal assets affect that organisation’s performance over time.106 Thus, to form a vision and mission,
and subsequently to select one or more strategies and determine how to implement them, organisations
use both the I/O and resource-based models.107 In fact, these models complement each other in that one
(I/O) focuses outside the organisation while the other (resource-based) focuses inside the organisation.
Next, we discuss the forming of the organisation’s vision and mission: the actions taken after the
organisation understands the realities of its external environment (Chapter 2) and internal organisation
(Chapter 3).

Vision and mission

After studying the external environment and the internal environment, the organisation has the
information it needs to form its vision and mission (see Figure 1.1). Stakeholders (those who affect or are
affected by an organisation’s performance, as explained later in the chapter) learn a great deal about an
organisation by studying its vision and mission. Indeed, a key purpose of vision and mission statements is
to inform stakeholders of what the organisation is, and what it seeks to accomplish in line with its strategic
direction.

Vision
Vision is a picture of what the organisation wants to be and, in broad terms, what it wants to ultimately vision
achieve.108 A vision statement articulates the ideal description of an organisation and gives shape to its a picture of what the
intended future. In other words, a vision statement points the organisation in the direction of where it would organisation wants
to be and, in broad
like to be in the years to come.109 An effective vision stretches and challenges people as well. Carmine Gallo, terms, what it wants
in her book about Steve Jobs, Apple’s phenomenally successful CEO, argues that one of the reasons Apple is to ultimately achieve
so innovative was Jobs’ vision for the company. She suggests that he thought bigger than, and differently
from, most people – she describes it as ‘putting a dent in the universe’. To be innovative, she explains that
one has to think differently about their products and customers – ‘sell dreams not products’ – and differently
about the story to ‘create great expectations’.110 Interestingly, many new entrepreneurs are highly optimistic
when they develop their ventures.111
It is also important to note that vision statements reflect an organisation’s values and aspirations and
are intended to capture the heart and mind of each employee and, hopefully, many of its other stakeholders.
An organisation’s vision tends to be enduring, while its mission can change with new environmental
conditions. A vision statement tends to be relatively short and concise, making it easily remembered.
Examples of vision statements include the following:

Our vision is to be the world’s best quick service restaurant.112

McDonald’s
 20 PART 1: STRATEGIC MANAGEMENT INPUTS

The Red Cross, born of a desire to bring assistance without discrimination to the wounded
on the battlefield, endeavors – in its international and national capacity – to prevent and
alleviate human suffering wherever it may be found. Its purpose is to protect life and
health and to ensure respect for the human being.113
The Red Cross

We aim to be the airline of choice for customers with specific needs, by providing a travel
experience that is comfortable and hassle free, whilst ensuring the safety of passengers
and our staff.114
Qantas

As an organisation’s most important and prominent strategic leader, the CEO is responsible for working
STRATEGY NOW with others to form the organisation’s vision. Experience shows that the most effective vision statement
Red Cross’s results when the CEO involves a host of stakeholders (e.g. other top-level managers, employees working
sustainability in different parts of the organisation, suppliers and customers) to develop it. In addition, to help the
vision organisation reach its desired future state, a vision statement should be clearly tied to the conditions in
the organisation’s external environment and internal organisation. Moreover, the decisions and actions
of those involved with developing the vision, especially the CEO and the other top-level managers, must
be consistent with that vision.

Mission
mission The vision is the foundation for the organisation’s mission. A mission specifies the business or businesses
specifies the business in which the organisation intends to compete and the customers it intends to serve.115 The organisation’s
or businesses in which mission is more concrete than its vision. However, similar to the vision, a mission should establish an
the organisation
intends to compete organisation’s individuality and should be inspiring and relevant to all stakeholders.116 Together, the vision
and the customers it and mission provide the foundation that the organisation needs to choose and implement one or more
intends to serve strategies. The probability of forming an effective mission increases when employees have a strong sense
of the ethical standards that guide their behaviours as they work to help the organisation reach its vision.117
Thus, business ethics are a vital part of the organisation’s discussions to decide what it wants to become
(its vision) as well as who it intends to serve and how it desires to serve those individuals and groups (its
mission).118
Even though the final responsibility for forming the organisation’s mission rests with the CEO, they
and other top-level managers often involve more people in developing the mission. The main reason is that
the mission deals more directly with product markets and customers, and middle- and first-level managers
and other employees have more direct contact with customers and the markets in which they are served.
McDonald’s mission statement, for example, flows from its vision of being the world’s best quick-service
restaurant:

Be the best employer for our people in each community around the world; deliver
operational excellence to our customers in each of our restaurants.119
McDonald’s

Some say that vision and mission statements provide little value. One expert believes: ‘Most vision
statements are either too vague, too broad in scope, or riddled with superlatives’.120 Clearly, vision and
mission statements that are poorly developed do not provide the direction an organisation needs to take
appropriate strategic actions. Still, as shown in Figure 1.1, an organisation’s vision and mission are
critical aspects of the strategic inputs required to engage in strategic actions that help to achieve strategic
 CHAPTER 1 21
Strategic management and strategic competitiveness

competitiveness and earn above-average returns. Therefore, organisations must accept the challenge of
forming effective vision and mission statements.

Stakeholders
Every organisation involves a system of primary stakeholder groups with whom it establishes and
manages relationships.121 Stakeholders are the individuals, groups and organisations who may affect the stakeholders
organisation’s vision and mission, who are affected by the strategic outcomes achieved, and who have the individuals and
groups who can affect
enforceable claims on the organisation’s performance.122 Claims on an organisation’s performance are
and are affected
enforced through the stakeholders’ ability to withhold participation essential to the organisation’s survival, by the strategic
competitiveness and profitability.123 Stakeholders continue to support an organisation when its performance outcomes achieved
and who have
meets or exceeds their expectations.124 Also, research suggests that organisations that effectively manage
enforceable claims
stakeholder relationships outperform those that do not. Stakeholder relationships therefore can be managed on an organisation’s
to be a source of competitive advantage.125 performance

Although organisations have dependency relationships with their stakeholders, they are not equally
dependent on all stakeholders at all times.126 As a consequence, not every stakeholder has the same level
of influence.127 The more critical and valued a stakeholder’s participation, the greater an organisation’s
dependence on it. Greater dependence, in turn, gives the stakeholder more potential influence over an
organisation’s commitments, decisions and actions. Managers must find ways to either accommodate or
insulate the organisation from the demands of stakeholders controlling critical resources.128

Classifications of stakeholders
The parties involved with an organisation’s operations can be separated into at least four groups.129 As
shown in Figure 1.4, there are the capital market stakeholders (shareholders and the major suppliers
of an organisation’s capital), the product market stakeholders (the organisation’s primary customers,
suppliers, host communities and unions representing the workforce), the organisational stakeholders (all
of an organisation’s employees, including both non-managerial and managerial personnel) and the natural
environment (as represented by activist groups).

Figure 1.4 The four stakeholder groups

People who are affected by an
Stakeholders organisation’s performance and who
have claims on its performance

Capital market Product market Organisational

stakeholders stakeholders stakeholders
• Shareholders • Primary customers • Employees
• Major suppliers of • Suppliers • Managers
capital (e.g. banks) • Host communities • Non-managers
• Unions

The natural world

• Natural resources
• Climate
• Governments and environmental groups

Each stakeholder group expects those making strategic decisions in an organisation to provide the
leadership through which its valued objectives will be reached.130 The objectives of the various stakeholder
groups often differ from one another, sometimes placing those involved with an organisation’s strategic
22 PART 1: STRATEGIC MANAGEMENT INPUTS

management process in situations where trade-offs have to be made. The most obvious stakeholders are
shareholders: individuals and groups who have invested capital in an organisation in the expectation of
earning a positive return on their investments. These stakeholders’ rights are grounded in laws governing
private property and private enterprise.
In contrast to shareholders, another group of stakeholders – the organisation’s customers – prefer that
investors receive a minimum return on their investments. Customers could have their interests maximised
when the quality and reliability of an organisation’s products are improved, but without high prices. High
returns to customers, therefore, might come at the expense of lower returns for capital market stakeholders.
Because of potential conflicts, each organisation must carefully manage its stakeholders. First, an
organisation must thoroughly identify and understand all important stakeholders. Second, it must prioritise
them in case it cannot satisfy all of them. Power is the most critical criterion in prioritising stakeholders.
Other criteria might include the urgency of satisfying each particular stakeholder group and the degree of
importance of each to the organisation.131
When the organisation earns above-average returns, the challenge of effectively managing stakeholder
relationships is lessened substantially. With the capability and flexibility provided by above-average
returns, an organisation can more easily satisfy multiple stakeholders simultaneously. When the
organisation earns only average returns, it is unable to maximise the interests of all stakeholders. The
objective then becomes one of at least minimally satisfying each stakeholder.
Trade-off decisions are made in light of how important the support of each stakeholder group is to the
organisation. For example, environmental groups may be very important to organisations in the energy
industry but less important to professional service organisations.132 An organisation earning below-average
returns does not have the capacity to minimally satisfy all stakeholders. The managerial challenge in this
case is to make trade-offs that minimise the amount of support lost from stakeholders. Societal values
also influence the general weightings allocated among the four stakeholder groups shown in Figure 1.4.
Although all the groups are served by organisations in the major industrialised nations, the priorities in
their service vary because of cultural differences. Next, we present additional details about each of the
major stakeholder groups.

Capital market stakeholders

Shareholders and lenders both expect an organisation to preserve and enhance the wealth they have
entrusted to it. The returns they expect are commensurate with the degree of risk accepted with those
investments (i.e. lower returns are expected with low-risk investments while higher returns are expected
with high-risk investments). Institutional investors (e.g. superannuation funds) often are willing
to sell their share in the fund if the returns are not what they desire, or to take actions to improve the
organisation’s performance, such as pressuring top managers to improve the governance oversight by the
board of directors. Some institutions owning major shares of an organisation’s shareholding may have
conflicting views about the actions needed, which can be challenging for managers. This is because some
may want an increase in returns in the short term, while others may desire a focus on building long-
term competitiveness.133 Managers may have to balance their desires with other shareholders or prioritise
the importance of the institutional owners with different goals. Clearly, shareholders who hold a large
share parcel (sometimes referred to as large-block shareholders – see Chapter 10 for more explanation) are
influential, especially in the determination of the organisation’s capital structure (i.e. the amount of equity
versus the amount of debt used). Often, large shareholders prefer that the organisation minimise its use of
debt because of the risk, its cost and the possibility that debt holders have first call on the organisation’s
assets in case of default over the shareholders.134

Product market stakeholders

Some might think that product market stakeholders (customers, suppliers and unions) share few common
interests. However, all these groups can benefit as organisations engage in competitive battles. For example,
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“You seem a little old for the part,” she suggested.
A young man of a rather assertive Bohemian appearance stood
before her.
“Hello!” was his greeting. The tone denoted surprise, rather than
familiarity. He hastily added: “Excuse me—is Victor—Mr. Baron—in?”
Bonnie May perceived that he was not quite comfortable, not at all
self-possessed. He seemed to her a strange person to be calling on
any of the Barons. Still, he seemed rather human.
“I’ll see,” she said. “Please step inside.” She would make him wait in
the hall, she decided.
“Tell him, please, that Baggot has called—that I’ve brought the first
act of my play.”
“A play! Oh!”
Again she hurried up the stairs; this time with unconcealed
eagerness. When she entered Mrs. Baron’s room she hesitated. “If
you’ll excuse me—” she faltered. “I’m looking for Mr. Victor.”
Mrs. Baron sat more erect, the open volume in her lap. “Forming a
little organization down-stairs?” she asked.
“Some one’s called for Mr. Victor. I wanted to tell him.”
“Very well. He’s in the library.” She nodded toward the adjoining
room.
Victor was alone in the library. He was in the attitude of one who is
about to write, but he was not writing. He was glowering at the paper
before him.
He sprang to his feet eagerly when Bonnie May appeared.
“I’ve been thinking about you,” he said. “Flora has, too. We meant to
come and find you before long and get you away from Mrs. Shepard.
We didn’t want to seem too eager, you know. We wanted to wait until
the governess——”
Bonnie May did not wait for him to finish; indeed, he seemed to have
difficulty about finishing. “Mr. Baggot has called,” she said. “It’s about
a play.” She was breathing uneasily. “And couldn’t I sit with you and
listen, please?” she added.
“Oh! Baggot! Baggot is one of my crosses, Bonnie May. Couldn’t you
shut the door in his face? It would be quite proper. He is one of those
silly fellows who think they are destined to write great plays. Couldn’t
you go down and put him out?”
She looked at him steadily without a word. She was smiling a little
scornfully.
“Very well. Suppose you go and ask him to come up—this time.”
“And—do let me come too! They’ve often let me listen when new
plays were being read.”
“Such wanton cruelty!” He shook his head slowly, as if it were quite
incredible. “Oh, well you may come, too,” he added.
Mrs. Baron glanced up from her book again when Bonnie May and
Baggot passed through the room. She spoke to Baggot in the most
casual manner. Bonnie May concluded that he must be a somewhat
frequent visitor. Mrs. Baron was quite frank in her indifference to him.
“I think you’ll find Victor in the library,” she said. She glanced
pointedly at the manuscript in his hand and frowned. “And would you
mind closing the door when you go in?”
Mrs. Baron achieved her cruelties sometimes with such a naïve
directness that they seemed to many people like a kind of high
breeding.
Baggot stepped gingerly into the next room, followed eagerly by
Bonnie May. He was closing the door softly when Baron greeted him.
“Hello, Baggot. Done something great again, of course?”
“Yes, I have!” retorted Baggot angrily. He wouldn’t endure Baron’s
bad manners, no matter how he might receive the bad manners of
Baron’s mother. “You’re going to say so, too. I’ve got the first act
finished. I’ve only got to fill in the scenario of the other acts, and I’ve
got the greatest play that ever came out of America.”
Baron smiled wearily. “And I’m to listen while you read the first act of
the greatest play, etc.?”
“Yes—and you’re to agree with me, too. I don’t see anything great in
your sneering at me all the time!” He pulled up a chair and sat down
so that his knees almost touched Baron’s.
Obviously, they were a pair of young men on very intimate terms.
Bonnie May slipped into a remote corner of the room and climbed
into a big chair. Her hand supported her chin; her eyes were
luminous. She did not mean to miss a word.
And Baggot began to read. His face was almost tortured with
nervous energy. He handled the pages as if they were in hopeless
confusion, yet he brought order out of them swiftly.
The reading proceeded ten minutes, twenty minutes, half an hour.
Baggot read with profound confidence and belief. His staccato tones
fairly hurled the words of the play at his auditors. Baron had put
away his cynic attitude. He had become deeply impressed. He had
even forgotten that it was his favorite pose not to seem deeply
impressed by anything.
Bonnie May was like one in a beautiful dream. She was not only
listening to the play; she was living it.
And then her dream was broken in a manner which filled her mind
with almost blank astonishment.
Mrs. Baron appeared in the doorway.
“Bonnie May,” she announced, “I think it’s high time for a little girl to
be in bed.”
 CHAPTER VI
CONCERNING A FROCK

It might have been, and should have been, apparent to the several
members of the Baron household that Bonnie May had been giving
an admirable exhibition of self-repression from the moment she had
entered the house.
A change came at last—when Mrs. Baron disturbed the reading of
the play and announced, at nine o’clock, that it was “high time for a
little girl to be in bed.”
Mrs. Baron couldn’t possibly have realized how Bonnie May had
been accustomed to divide her hours between sleeping and waking.
The guest had spent her life among player people, whose active
hours begin at noon or later, and who do not deem the day ended
until after midnight—sometimes far later than midnight. Nor had it
been found convenient—or needful—by Bonnie May’s fellow workers
to make any exception to the rule on her behalf. She had been one
of them, and she had fared well and pleasantly.
Thus it was that when Mrs. Baron appeared, somewhat like a bolt
out of a clear sky, the child gave way to overwhelming rebellion.
“I’m not used to going to bed at this hour,” she declared bluntly. She
arose and stood by her chair, like a soldier by his guns, as the saying
is. And taking in the inexorable expression in Mrs. Baron’s eyes, she
turned appealingly to Baron. She was relying upon him to help her.
“Couldn’t she—” began Baron weakly, and added, quite without
conviction: “You know it’s Saturday night, mother!” He was glad he
had thought of its being Saturday, though he couldn’t see why that
should make very much difference. He really believed his mother’s
position was strong enough, if she had only gone about the matter
more tactfully.
“Saturday night doesn’t make any difference,” declared Bonnie May,
her rebellion now including Baron in its scope. “It just isn’t a
reasonable bedtime.”
Baron felt ready to surrender. “Anyway, it won’t be so bad just for
one night,” he ventured.
“Never mind, Victor,” said Mrs. Baron pointedly. She addressed
herself to Bonnie May. “What you’ve been accustomed to may not be
quite so important as what you ought to become accustomed to,”
she said. “Come!”
The child sauntered thoughtfully from the room. She had been
impressed by the fact that even Baron had not seemed surprised by
the suggestion that she ought to go to bed. She was trying to
comprehend the situation. After all, people who were not of the
profession had ways of their own, she realized. If they had all
decided to go to bed, she wouldn’t have minded so much. But they
were laying down a special law for her.
Rebellion triumphed again. In Mrs. Baron’s room she halted. “Where
am I to sleep?” she inquired.
“I think you heard me tell Mrs. Shepard to prepare a room.”
“In the attic? Yes. But I’m not going to sleep there.”
“Indeed, you are.”
“I beg your pardon! Not under any circumstances!”
Mrs. Baron lifted her fingers to her lips and coughed—a very inexpert
cough. “You’ll have to do as I tell you, you know.” She resumed a
resolute march toward the hall, her hand pressed firmly against
Bonnie May’s back.
The child jerked away with a sense of outrage. She had never been
treated so before.
“Truly, you’ll have to obey me,” repeated Mrs. Baron.
Bonnie May was alarmed; she quite lost control of herself. “Stop your
kiddin’!” she said with a catch in her voice. She tried to say it
playfully, but her self-possession was gone. Her remark had
sounded simply offensive, indelicate.
“And I can’t permit you to use such language, either!” declared Mrs.
Baron.
The dismayed guest pressed her hands to her eyes as if she were
trying to think clearly.
Then she made a rush for the stairway!
Mrs. Baron put dignity aside long enough to pursue her, to seize her
by the arm. She was becoming outraged, greatly indignant. “What do
you mean to do?” she demanded, her voice trembling slightly.
“I’m quitting.”
“You’re——”
“I won’t stay here!”
The distressed old gentlewoman tried to calm herself. “Where do you
think of going?” she asked.
“Anywhere—to the theatres. Any company in town will be glad to
have me. They will know who I am. They—they are the kind of
people who will appreciate me!” The words were spoken in a tone of
heart-break, of despair.
Mrs. Baron afterward confessed to members of her family that for the
first time in her life she felt completely helpless. She was, in truth, a
somewhat childish person in many ways, and she was not
accustomed to any unpleasantnesses save those which she created
for others.
At any rate, she swallowed with difficulty—and surrendered. “It’s a
very small point, after all,” she said ungraciously. “Go into my room.
Flora will look after you.” She spoke coldly, all her interest seemingly
withdrawn.
And just as the guest disappeared into Mrs. Baron’s sitting-room,
Flora came almost stealthily up the stairs.
“I wish you’d put that little limb of Satan to bed,” she said. Flora saw
that her mother’s hand, on the balustrade, trembled.
“Where shall I put her?” she inquired.
“Anywhere! just so you get her covered up for the night.”
Flora paused, her eyes uneasily seeking her mother’s.
“I’m afraid you’re angry with me, mother,” she said humbly.
“With you? Certainly not.”
Flora was puzzled. Her mother had long ago declared that Mr. Addis
must not be accepted as a visitor. Did she know that he had just
gone? She was about to enter her mother’s sitting-room when
something prompted her to turn.
“You knew Mr. Addis called, didn’t you?” she asked.
Mrs. Baron’s face flamed again. “Knew it? Certainly, I didn’t know it!
I’ve told Mrs. Shepard—I don’t intend that he shall annoy you!”
“Oh, mother! He doesn’t! And I think Mrs. Shepard didn’t know, this
time. Bonnie May went to the door and let him in. She called me
down-stairs without telling me who it was.” Flora surveyed her
mother yearningly, yet with a kind of gentle courage. “I don’t believe
in hiding things from you, mother. But I was glad to see him.”
Mrs. Baron looked grimly toward her own door. “She let him in! Very
well. Put her to bed!”
She descended the stairs with dignity. She must have been thinking
of future victories rather than of past defeats.

When Flora entered the sitting-room she found Bonnie May standing
in uneasy contemplation.
“Mother says I’m to put you to bed,” said Miss Baron.
“Why didn’t she go ahead and put me to bed herself?”
Flora perceived that the question was not wanting in sincerity. She
decided to answer quite honestly.
“I think,” she ventured gently, “you must have said something to vex
her.”
“Not at all. She tried to vex me. I behaved very properly.”
Flora sighed and shook her head slowly; but she was smiling, too.
She was wondering what it really was that had gone wrong.
“Possibly you didn’t want to obey her?” she ventured.
The child’s brow puckered. “But why should I want to obey her?”
“Why—because she’s going to be good to you, I’m sure.”
“Well, I mean to be good to her, too—if she’ll let me. And I don’t ask
her to obey me.”
“But it’s different. She’s an old lady.”
“Well, I’ve got no patience with old people. It’s all right, just as a part,
but there’s no use putting it on all the time.”
“But, dear,” implored Flora, drawing the child within the curve of her
arm, “don’t say that! I know you mean to be nice and kind, but truly
you don’t understand. We must all grow old some time—even you
will get to be old.”
The guest gave deliberate thought to this; then her expression
became resolute. “Well, if they ever hang any gray hairs on me
they’ll have to catch me when I’m asleep—I’ll tell you that right now.”
Miss Baron was not encouraged to argue the point any further. She
resumed the subject of going to bed.
“You know I’m to have his room—your brother’s?” the guest insisted.
“Mother said you might sleep where you liked.”
“Did she say that?”
“Almost exactly.”
“Well, where is that attic room?”
“It’s up one more flight of stairs—under the roof.”
The child looked quite wistful and earnest, and then her words came
with conviction. “I just couldn’t sleep up there. Attics are where
misers sleep, and poor children. It’s where people die of hunger and
cold. It’s never the right kind of people. Come, let’s go to his room.”
And so they did.
“You won’t mind my helping you?” pleaded Flora.
“Helping me?”
“To undress, you know—and to be tucked in!”
The guest looked at her unresponsively. “But I’ve been used to doing
that for myself,” she said.
Flora quickly stooped and took her into her arms impulsively. “Dear
child,” she cried, her voice tremulous, “let me do it to-night! I think
you’ll love it—and I’ll love it, too.” She drew the perplexed face
almost roughly against her own.
She did not wait to be refused. She hurried into the bathroom and
busied herself; she was singing a little crooning song. There was
also the noise of water splashing into the tub.
She reappeared presently. “The water is ready—for your bath, you
know, and I’ve left one of my nighties there for you.” She smiled
happily. “Of course it will be too big. I’ll make you some little ones
soon.”
The seeming perversion of the child asserted itself again. “I usually
take my bath in the morning,” she said a little stiffly; but she saw how
the glad light in Miss Baron’s eyes wavered, and she added quickly,
“but it will be all right.” And she went out into the bathroom.
When she reappeared after a rather long time she was smiling
radiantly. She had on Flora’s nightgown, soft and white, with pink
ribbons. She held it daintily up before her feet, and glanced back at
the train that dragged behind. “Isn’t it lovely!” she said.
“It is, dear,” said Flora.
She had turned the white coverlet and the sheet down. Now she
watched the child scramble up into the bed. She wanted to help, but
she refrained.
“Would you like me to tell you a story?” asked Flora.
Bonnie May looked at her swiftly, incredulously. “No!” she said. She
burst out into riotous laughter. “I’m not an infant,” she explained.
Flora flushed. “Very well,” she said gently. Yet she lingered in the
room a little while. She put some of Victor’s masculine decorations
out of sight. She adjusted the blind. She was about to extinguish the
light when she looked again at the strange guest.
The child’s eyes were fixed upon her widely, wonderingly.
“You lovely thing!” said Bonnie May.
“Good night, dear!” said Flora. And then she knew that the child
wished to speak to her, and she went over and bent above the bed.
“What is it, Bonnie May?” she asked.
The child stared before her in silence for a moment and then the
words came. “I wished so much that she would love me!” she said. “I
tried so hard....”
Flora slipped her hand under the guest’s head. “I’ll tell you a secret,”
she whispered. “If she hadn’t cared for you, she would have been
quite polite; she would have been wonderfully gracious. She was
ungracious and unkind because—because she loved you, dear. It
seems absurd, doesn’t it? But I know.”

It was an absurd theory, perhaps; yet there was certainly needed

some explanation of Mrs. Baron’s course later in the evening.
The house became quiet after a time. The rumbling voices in the
library ceased and Baggot, with meticulous circumspection, wended
his way down the stairs and was gone. Later, Victor emerged from
the library and disappeared for the night. Baron, Sr., came in and sat
and smoked awhile—and retired. Flora sat in the sitting-room
lingeringly, gazing pensively at a book without turning its pages, and
at length she arose and kissed her mother’s cheek and said good
night.
And then Mrs. Baron tiptoed into another room and rummaged in a
bureau drawer and found a gay piece of gingham which had been
waiting its time to be useful. With this in her hands she returned to
her sitting-room, and spread work materials upon her table. And with
patience and fortitude and a kind of rapt self-absorption she worked
far into the night.

The usual Sunday-morning quietude of the mansion was disturbed

somewhat when the family again assembled. An extraordinary event
had occurred.
Mrs. Baron had sat up late the night before and had made a Dress.
In announcing the fact she had pronounced the word in such a
manner that the use of the capital letter is fully justified. She
displayed the Dress for the admiration of her son and her daughter,
and her husband. And finally she generously relinquished it to Flora.
“You may give it to her,” she said rather loftily.
Bonnie May had not yet appeared.
Flora, knocked softly on the guest’s door and without waiting went
into the room, displaying the new garment rather conspicuously.
“What’s that?” inquired Bonnie May dubiously.
“It’s a new dress for you.”
“It was never made for me,” affirmed the child with conviction.
“Indeed, it was. Mother sat up ever so late last night and made it for
you.”
“Well, that, of course, was a matter I should have been consulted
about.”
Bonnie May was now sitting on the edge of the bed, trying to make
the toes of one foot come in contact with the floor. Miss Baron sat on
a low chair in the middle of the room, the new dress spread across
her knees.
“But you’re glad, aren’t you?” she asked.
“I’m glad in a way. I’m glad that anybody so disagreeable could really
try to do you a good turn.” Clearly, each day was a new day, with
Bonnie May.
“But, dear child, mother won’t seem disagreeable to you when you
come to know her. It hurts me to have you speak so of her—truly it
does. And I think she must have worked until she was very weary,
making the dress for you.”
“I appreciate all that,” the guest hastened to explain, genuine
compunction in her voice. “But you see, the dress isn’t at all
suitable.”
“I’m sure you’ll like it much better when you try it on.”
“Take my word for it—it won’t do.”
Miss Baron felt for the moment as if she could have pounced upon
the child and spanked her. But she noticed how one curl fell outside
her ear, and how the eyes and voice were profoundly earnest, and
how the attitude was eloquent of a kind of repentance before the
fact.
And so she said: “Won’t you do something for me that will please me
better than anything else I can think of—something that will take only
a minute?”
Bonnie May looked at her meditatively—and then began to laugh
quite riotously! “You don’t look the part!” she gurgled in justification.
“What part, please?” The question was put somewhat blankly.
“You’re talking like a—oh, a Lady Clare, and you haven’t even got
your shoes buttoned up!”
Miss Baron slowly regarded her shoes; then her glance travelled
calmly to Bonnie May; then she rather dully inspected the dress that
lay across her knees. Her countenance had become inscrutable.
She turned away from the guest’s scrutiny, and after a moment she
arose slowly and left the room, carrying the dress with her.
She did not stop to define her feelings. She was wounded, but she
felt sharp resentment, and she was thinking rebelliously that she was
in no degree responsible for Bonnie May. Still ... her sense of justice
stayed her. She had the conviction that the child’s remark, if
inexcusably frank, was a fair one. And it had been made so joyously!
However, she meant to go to her mother with a request to be
excused from any further humiliation as Bonnie May’s handmaiden.
But before she had proceeded half a dozen steps she began to fear
even greater disaster, if Mrs. Baron should undertake to be the
bearer of the rejected dress.
It would be a victory worth working for, if she could overcome the
fastidious guest’s prejudice.
She went to her room and carefully buttoned her shoes and made
other improvements in her toilet. Then she went back into Bonnie
May’s presence.
“I was untidy,” she confessed. “I hope you’ll excuse me.” She was
smoothing out the new dress. “You see, I only meant to wear my
every-day shoes until after breakfast, and then put on my good
shoes, for Sunday-school and church. And I’ve been very busy.”
Bonnie May pondered this judicially. “It’s lovely of you to be so nice
about it,” she finally admitted, “but I’m afraid I don’t get your idea....”
She frowned. “Every-day shoes’ and ‘Sunday shoes,’” she repeated
vaguely.
“Well?” said Flora persuasively.
“Don’t you like to be as good on Saturday as on Sunday?”
“Why, yes—just as good, certainly.” Flora was looking bewildered.
“And on Friday, and on other days?”
“Yes, I think so.”
“Well, why shouldn’t you wear your ‘good’ shoes all the week, then?”
“But people must look nicer on Sundays than on other days.”
“I don’t see why. If you only look nice, I don’t see what’s the good.
And if you really are nice, I think the nice shoes might help all the
time.”
“What I mean is,” persisted Flora patiently, “I don’t like to work in my
nice shoes.” She brought this out somewhat triumphantly.
“That’s funny. That’s the very time I like to look my best. Nothing is
as important as your work, is it?”
Flora was almost in despair. “I doubt if I ever thought of it in just that
light,” she admitted. “I’ll think it over, if you’ll try the dress on—and if
you don’t like it, off it comes!”
“Well, all right.” (This with a sudden calm which was not reassuring.)
Flora slipped the gingham dress into place, and patted it here and
there with the air of one who admires, and viewed it with her head
inclined a little, as women do in such a situation. “It’s the dearest
thing!” she said honestly. “Now come and see how you look.”
The mirror was a little high. She lifted Bonnie May to a chair.
She was alarmed by what ensued. The child stared fixedly, with
incredulous eyes in which a great horror grew.
“Oh, Lord!” she cried, clapping her hands over her eyes. “Take it off!
Take it off!”
“What in the world is the matter?” demanded Flora.
“She asks me what is the matter! Oh, heavens!” Bonnie May jumped
down from the chair and turned her back to the mirror. She was
wringing her hands.
“I don’t understand at all!” exclaimed Miss Baron hopelessly.
“You might!” was the emphatic rejoinder. “Do you suppose I want to
play that kind of a part—here? It might do for the little sister of a
sewing-machine girl, or a mountain-pink with her hair in knobs. But it
wouldn’t do for anything else. If you was only one of the populace, a
costume like that would cause a scream! If you don’t understand it,
take my word for it. I can’t wear it! I ask you to take it off!”
Miss Baron became very quiet. She became thoughtful, too. She had
not failed to catch the drift of these exaggerated words. There was
something prim, something rudimentary, about the dress. Color
suffused her cheeks; she hung her head. She felt a forlorn inclination
to laugh. From a vantage point behind the child she began to remove
the gingham dress.
It was inappropriate. She had to admit it. It was a dress for a
Gretchen; for the Cinderella of the kitchen, rather than the princess
of the coach-and-four. It wasn’t becoming at all.
 CHAPTER VII
A SUNDAY MORNING

The Barons were the kind of family that have just one morning
newspaper left at their door on Sunday, and who believe that it
contains everything that ought to concern them in any way—that
whatever is published in any other newspaper is to be regarded with
scepticism, or lightly discredited.
Yet on this particular Sunday morning Victor Baron arose early and
intercepted the paper-carrier, and amazed that industrious youth by
buying a copy of every journal he carried.
With this not inconsiderable burden under his arm he betook himself
to the library and began an eager search for certain information.
He scanned all the advertising columns systematically, and then
turned to the news departments.
A great heap of discarded “sections” grew about him as he
progressed, and little by little a look of troubled anticipation vanished
from his eyes. The last section of the last paper was cast away with
an air of triumph.
He hadn’t been able to find a single word about any child who was
lost, or who had strayed, or who had been stolen!
“Good!” he exclaimed, and he looked with great relief at the heap of
papers about him, their splotches of color and assertive head-lines
having no further interest for him. He smiled complacently.
In the meantime, in the sunny sitting-room up-stairs, Flora had
broken the news to Mrs. Baron—the news touching Bonnie May and
the new dress.
It had been a very difficult thing to do, because Mrs. Baron was
always at her worst on Sunday mornings.
It was on Sunday mornings that she felt most keenly the lapse of the
neighborhood from former glories to a condition of sordid griminess.
It was on these mornings that she fared forth to the old church, only
three blocks away, in which the best people in town had formerly
worshipped, but which had been deserted by nearly all the old
parishioners.
It was Mrs. Baron’s contention that it was indelicate, to say the least,
for people to desert a church. There were things in the church life,
she maintained, which could not be transplanted, and which
constituted the very warp and woof of the domestic as well as the
social foundations. She had come to regard herself as a kind of
standard-bearer in this relationship, and she attended services
somewhat ostentatiously, with the belief that she was not only
lending her influence, but administering a rebuke as well. Ignoring
the protests of her family, she had even consented to play the organ
for the Sunday-school services. As a young lady she had learned to
read music, as a matter of course, and though she possessed no
musical intelligence, and had found it impossible to regain the old
manual skill she had once possessed, she played the simple hymns
with a kind of proud rigor, because she believed her participation in
the services in this direction must impart an authority to the
proceedings which the abler playing of some obscure individual
could not have imparted.
Indeed, Mrs. Baron was a personage on Sunday mornings; a gallant
general leading a forlorn hope proudly and firmly.
When Flora confessed to her that the dress had been rejected, she
was too greatly amazed to say a great deal. She had also entered
upon her stoic mood—her Sunday-morning mood.
“You see, she is simply determined not to get along,” she declared
with finality. She took the dress into her own hands and regarded it
critically. “Do you see how carefully the feather-stitching is done?”
she demanded.
“Yes,” agreed Flora, “the—the feather-stitching is beautiful. But
really, I don’t believe she is simply perverse. If you could have seen
the dismay in her eyes—” Flora smiled at the recollection.
“I’ve seen women like that,” Mrs. Baron continued, “women who like
to make difficulties; who go into hysterics over little things. It’s always
just a lack of sense—that’s all it is.”
“Yes—or temperament. I expect there’s a good deal in what people
call temperament. I didn’t know children had it so much, but Bonnie
May isn’t like other children. Maybe she has a good deal of
temperament.”
They examined the dress together without any very definite purpose.
“She ought to know she can’t go on wearing that silly thing she came
here in,” was Mrs. Baron’s next comment.
“She must realize that,” agreed Flora. She added casually: “I think
something soft, with a little color in it, might please her. You might let
me try next time.”
This was the wrong note again. “As if I weren’t capable of making a
child’s dress!” protested Mrs. Baron.
“I only meant it would be fair to divide the work,” Flora explained
gently. “I didn’t mean I could do it better.”
As if her anger had been effectually checked in that direction, Mrs.
Baron hit upon another possible grievance. “And she’s going to
Sunday-school to-day,” she affirmed in a tone which seemed to take
account of difficulties. “We’ve done our best to dress her decently.
And I don’t intend to humor a little pagan as long as she’s in a
Christian household.”
“But in that—that peculiar dress?” faltered Flora. She had a vision of
Bonnie May in her fantastic old frock associating with the prim
children of poverty who were now the mainstay of the Sunday-
school.
“She may walk with Mrs. Shepard. People may believe she belongs
to her, if they want to.”
“Oh, mother!” There was something almost despairing in Flora’s
tone.
“It’s the best we can do. I mean to do my duty—and I’m not willing to
look ridiculous.”
Again Miss Baron perceived breakers ahead. If the child conceived
the idea that she was being commanded to go anywhere she would
very probably develop new methods of resistance. If she were
politely invited to accompany other members of the household to
church, she might decide to be altogether gracious.
She entertained a lingering regret that the guest could not be
persuaded to wear the new dress—in which, certainly, she would be
conspicuous enough, but not quite in a flaunting fashion. She even
thought of Victor, and wondered if he might not be able to prevail
upon the child to accede to the wishes of her elders. But upon
second thought she decided not to involve her brother in a phase of
the problem which did not touch him. She suspected there would be
other phases, more in his line, in due time.

In the meanwhile, the object of all this solicitous thought was

leisurely preparing to make her appearance.
That she had no fresh raiment to put on was not particularly
disquieting. The fact that it was a Sunday morning made no
difference to her at all. Certainly she needed fresh linen, but this, she
philosophically concluded, would be provided within another day or
two. Her shoes were quite new and neat, and she was by no means
ashamed of the dress which now constituted her complete wardrobe.
On a chair by her bed she made discoveries. There was a fresh
towel; a little package which obviously contained a tooth-brush; a
box of tooth-powder, and—crowning gift—a new hair-ribbon of
adorable width and hue.
She tucked these things under one arm, and with her free hand she
carefully gathered Flora’s long nightgown away from her feet. Then
she started to the bathroom.
In the hall she paused to be sure that the way was clear.