Contents. Preface xiii. Part 1 Introduction to Strategic Management. 1. Strategic
Leadership: Managing the Strategy-Making. Process for Competitive Advantage.
Charles W. L Hill UNIVERSITY OF WASHINGTON
Gareth R.Jones TEXAS A&M
UNIVERSITY
Houghton Mifflin Company
Boston
NewYork
Contents Preface xiii
Part 1
1
Introduction to Strategic Management Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage
1
Opening Case: Dell Computer 1 Overview 3 Strategic Leadership, Competitive Advantage, and Superior Performance 4 Superior Performance 4 • Competitive Advantage and a Company's Business Model 5 • Industry Differences in Performance 7 • Performance in Nonprofit Enterprises 7 Strategic Managers 8 Corporate-Level Managers 8 • Business-Level Managers 10 • Functional-Level Managers 10 The Strategy-Making Process 10 A Model of the Strategic Planning Process 10 • Mission Statement 11 • External Analysis 16 Strategy in Action 1.1: Strategic Analysis at Time Inc. 17 Internal Analysis 18 • SWOT Analysis and the Business Model 18 • Strategy Implementation 19 • The Feedback Loop 19 Strategy as an Emergent Process 20 Strategy Making in an Unpredictable World 20 • Autonomous Action: Strategy Making by Lower-Level Managers 20 Strategy in Action 1.2: Starbucks's Music Business 21 . Serendipity and Strategy 21 Strategy in Action 1.3: A Strategic Shift at Charles Schwab 22 Intended and Emergent Strategies 22 Strategic Planning in Practice 24 Scenario Planning 24 • Decentralized Planning 25 • Strategic Intent 26 Strategic Decision Making 27 Cognitive Biases and Strategic Decision Making 27 • Groupthink and Strategic Decisions 29 • Techniques for Improving Decision Making 29 Strategy in Action 1.4: Was Intelligence on Iraq Biased by Groupthink? 30 Strategic Leadership 31 Vision, Eloquence, and Consistency 31 • Articulation of the Business Model 32 • Commitment 32 • Being Well Informed 32 • Willingness to Delegate and Empower 33 9 The Astute Use of Power 33 • Emotional Intelligence 33 Summary of Chapter 34 • Discussion Questions 35 Practicing Strategic Management 35 Small-Group Exercise: Designing a Planning System • Article File 1 • Strategic Management Project: Module 1 • Ethics Exercise
IV
Contents
Closing Case: The Best-Laid Plans—Chrysler Hits the Wall 37 Appendix to Chapter 1: Enterprise Valuation, ROIC, and Growth 39
2
Part 2
3
External Analysis: The Identification of Opportunities and Threats
41
Opening Case: The United States Beer Industry 41 Overview 42 Defining an Industry 43 Industry and Sector 43 9 Industry and Market Segments 44 9 Changing Industry Boundaries 44 Porter's Five Forces Model 45 Risk of Entry by Potential Competitors 46 Strategy in Action 2.1: Circumventing Entry Barriers into the Soft Drink Industry 47 Rivalry Among Established Companies 49 Strategy in Action 2.2: Price Wars in the Breakfast Cereal Industry 51 Industry Demand 51 9 Cost Conditions 52 9 Exit Barriers 52 9 The Bargaining Power of Buyers 53 9 The Bargaining Power of Suppliers 54 Strategy in Action 2.3: Wal-Mart's Bargaining Power over Suppliers 55 Substitute Products 56 9 A Sixth Force: Complementors 56 9 Porter's Model Summarized 57 Running Case: Dell Computer and the Personal Computer Industry 57 Strategic Groups Within Industries 58 Implications of Strategic Groups 59 9 The Role of Mobility Barriers 59 Industry Life Cycle Analysis 60 Embryonic Industries 61 9 Growth Industries 61 9 Industry Shakeout 61 9 Mature Industries 62 9 Declining Industries 63 9 Industry Life Cycle 63 Limitations of Models for Industry Analysis 63 Life Cycle Issues 63 9 Innovation and Change 64 9 Company Differences 66 The Macroenvironment 66 Macroeconomic Forces 66 9 Global Forces 68 9 Technological Forces 68 9 Demographic Forces 69 9 Social Forces 70 9 Political and Legal Forces 70 Summary of Chapter 71 9 Discussion Questions 71 Practicing Strategic Management 72 Small-Group Exercise: Competing with Microsoft • Article File 2 • Strategic Management Project: Module 2 • Ethics Exercise Closing Case: The Pharmaceutical Industry 73
The Nature of Competitive Advantage
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability Opening Case: Southwest Airlines 75 Overview 76 The Roots of Competitive Advantage 77 Distinctive Competencies 77 9 Competitive Advantage, Value Creation, and Profitability The Value Chain 83 Primary Activities 83
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Contents
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Strategy in Action 3.1: Value Creation at Burberry 85 Support Activities 85 Strategy in Action 3.2: Competitive Advantage at Zara 86 The Building Blocks of Competitive Advantage 87 Efficiency 87 9 Quality as Excellence and Reliability 88 9 Innovation 90 9 Customer Responsiveness 91 9 Business Models, the Value Chain, and Generic Distinctive Competencies 91 Analyzing Competitive Advantage and Profitability 93 Running Case: Comparing Dell to Hewlett-Packard 95 The Durability of Competitive Advantage 97 Barriers to Imitation 97 9 Capability of Competitors 99 9 Industry Dynamism 99 9 Summarizing Durability of Competitive Advantage 100 Avoiding Failure and Sustaining Competitive Advantage 100 Why Companies Fail 100 9 Steps to Avoid Failure 102 Strategy in Action 3.3: The Road to Ruin at DEC 103 The Role of Luck 104 Strategy in Action 3.4: Bill Gates's Lucky Break 105 Summary of Chapter 105 9 Discussion of Questions 106 Practicing Strategic Management 106 Small-Group Exercise: Analyzing Competitive Advantage • Active File 3 • Strategic Management Project: Module 3 • Ethics Exercise Closing Case: Starbucks 107
4
Building Competitive Advantage Through Functional-Level Strategy Opening Case: Boosting Efficiency at Matsushita 109 Overview 110 Achieving Superior Efficiency 111 Efficiency and Economies of Scale 111 9 Efficiency and Learning Effects 113 Strategy in Action 4.1: Learning Effects in Cardiac Surgery 114 Efficiency and the Experience Curve 115 9 Efficiency, Flexible Production Systems, and Mass Customization 117 Strategy in Action 4.2: Mass Customization at Lands' End 118 Marketing and Efficiency 119 Materials Management, Just-in-Time, and Efficiency 121 R&D Strategy and Efficiency 122 9 Human Resources Strategy and Efficiency 122 9 Information Systems and Efficiency 124 9 Infrastructure and Efficiency 124 Running Case: Dell's Utilization of the Internet 125 Summary: Achieving Efficiency 125 Achieving Superior Quality 126 Attaining Superior Reliability 126 Strategy in Action 4.3: General Electric's Six Sigma Quality Improvement Process 128 Implementing Reliability Improvement Methodologies 128 9 Improving Quality as Excellence 132 Strategy in Action 4.4: Six Sigma at Mount Carmel Health 132 Achieving Superior Innovation 134 The High Failure Rate of Innovation 134 9 Building Competencies in Innovation 136 Strategy in Action 4-5 : Corning: Learning from Innovation Failures 141 Achieving Superior Responsiveness to Customers 142 Focusing on the Customer 142 9 Satisfying Customer Needs 143 Summary of Chapter 145 9 Discussion Questions 146
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Contents
Practicing Strategic Management 146 Small-Group Exercise: Identifying Excellence Module 4 • Ethics Exercise Closing Case: Verizon Wireless 147
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Article File 4
Part 3
Strategies
5
Building Competitive Advantage Through Business-Level Strategy
6
•
Strategic Management Project:
149
Opening Case: ETrade's Changing Business Strategies 149 Overview 150 Competitive Positioning and the Business Model 151 Formulating the Business Model: Customer Needs and Product Differentiation 151 9 Formulating the Business Model: Customer Groups and Market Segmentation 153 9 Implementing the Business Model: Building Distinctive Competencies 156 Competitive Positioning and Business-Level Strategy 157 Competitive Positioning: Generic Business-Level Strategies 159 Cost Leadership 160 Strategy in Action 5.1: Ryanair Takes Control over the Sky in Europe 162 Focused Cost Leadership 163 9 Differentiation 166 9 Focused Differentiation 168 Strategy in Action 5.2: L. L. Bean's New Business Model 169 The Dynamics of Competitive Positioning 170 Strategy in Action 5.3: Zara Uses IT to Change the World of Fashion J 71 Competitive Positioning for Superior Performance: Broad Differentiation 172 Strategy in Action 5.4: Toyota's Goal? A High-Value Vehicle to Match Every Customer Need 174 . Competitive Positioning and Strategic Groups 177 9 Failures in Competitive Positioning 179 Strategy in Action 5.5: Holiday Inns on Six Continents 181 Summary of Chapter 182 9 Discussion Questions 183 Practicing Strategic Management 183 Small-Group Exercise: Finding a Strategy for a Restaurant • Article File 5 • Strategic Management Project: Module 5 • Ethics Exercise Closing Case: Samsung Changes Its Business Model Again and Again 184
Business-Level Strategy and the Industry Environment
186
Opening Case: Competition Gets Ugly in the Toy Business 186 Overview 187 Strategies in Fragmented Industries 188 Chaining 189 9 Franchising 190 9 Horizontal Merger 190 9 Using Information Technology and the Internet 190 Strategy in Action 6.1: Clear Channel Creates a National Chain of Local Radio Stations 191 Strategies in Embryonic and Growth Industries 192 The Changing Nature of Market Demand 193 9 Strategic Implications: Crossing the Chasm 195 Strategy in Action 6.2: How Prodigy Fell into the Chasm Between Innovators and the Early Majority 197 Strategic Implications of Market Growth Rates 198 9 Factors Affecting Market Growth Rates 198 9 Strategic Implications of Differences in Growth Rates 199
Contents
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VII
Navigating Through the Life Cycle to Maturity 200 Embryonic Strategies 201 9 Growth Strategies 201 9 Shakeout Strategies 202 9 Maturity Strategies 203 Strategy in Mature Industries 203 Strategies to Deter Entry: Product Proliferation, Price Cutting, and Maintaining Excess Capacity 204 9 Strategies to Manage Rivalry 206 Strategy in Action 6.3: New Competitors for Toys "R" Us 207 Running Case: Dell Has to Rethink Its Business-Level Strategies 212 Game Theory 214 Strategy in Action 6.4: Coca-Cola and PepsiCo Go Head-to-Head 220 Strategies in Declining Industries 221 The Severity of Decline 221 9 Choosing a Strategy 222 Strategy in Action 6.5: How to Make Money in the Vacuum Tube Business 223 Summary of Chapter 224 9 Discussion Questions 225 Practicing Strategic Management 225 Small-Group Exercise: How to Keep the Salsa Hot • Article File 6 • Strategic Management Project: Module 6 • Ethics Exercise Closing Case: Nike's Winning Ways 226
Strategy and Technology
228
Opening Case: Format War—Blu-Ray Versus HD-DVD 228 Overview 229 Technical Standards and Format Wars 230 Examples of Standards 230 9 Benefits of Standards 232 9 Establishment of Standards 233 9 Network Effects, Positive Feedback, and Lockout 233 Strategy in Action 7.1: How Dolby Became the Standard in Sound Technology 236 Strategies for Winning a Format War 237 Ensure a Supply of Complements 237 9 Leverage Killer Applications 237 9 Aggressively Price and Market 238 9 Cooperate with Competitors 238 9 License the Format 239 Costs in High-Technology Industries 240 Comparative Cost Economics 240 9 Strategic Significance 241 Strategy in Action 7-2: Lowering the Cost of Ultrasound Equipment Through Digitalization 242 Managing Intellectual Property Rights 242 Intellectual Property Rights 243 9 Digitalization and Piracy Rates 243 9 Strategies for Managing Digital Rights 244 Strategy in Action 7.3: Battling Piracy in the Videogame Industry 245 Capturing First-Mover Advantages 246 First-Mover Advantages 247 9 First-Mover Disadvantages 247 9 Strategies for Exploiting First-Mover Advantages 248 Technological Paradigm Shifts 251 Paradigm Shifts and the Decline of Established Companies 252 Strategy in Action 7-4: Disruptive Technology in Mechanical Excavators 255 Strategic Implications for Established Companies 256 9 Strategic Implications for New Entrants 258 Summary of Chapter 258 9 Discussion Questions 259 Practicing Strategic Management 259 Small-Group Exercise: Digital Books • Article File 7 • Strategic Management Project: Module 7 • Ethics Exercise Closing Case: The Failure of Friendster 260
VIII
Contents
Strategy in the Global Environment
9
262
Open i ng Case: MTV—A Global Brand Goes Local 262 Overview 263 The Global and National Environments 264 The Globalization of Production and Markets 264 Strategy in Action 8.1: Finland's Nokia 266 National Competitive Advantage 267 9 Using the Framework 269 Increasing Profitability and Profit Growth Through Global Expansion 269 Expanding the Market: Leveraging Products 270 9 Realizing Cost Economies from Global Volume 270 9 Realizing Location Economies 271 9 Leveraging the Skills of Global Subsidiaries 272 Cost Pressures and Pressures for Local Responsiveness 273 Pressures for Cost Reductions 274 9 Pressures for Local Responsiveness 275 Strategy in Action 8.2: Localization at IKEA 276 Choosing a Global Strategy 278 Global Standardization Strategy 279 Running Case: Dell's Global Business Strategy 279 Localization Strategy 280 9 Transnational Strategy 280 9 International Strategy 282 9 Changes in Strategy over Time 282 Basic Entry Decisions 283 Which Overseas Markets to Enter 283 9 Timing of Entry 284 9 Scale of Entry and Strategic Commitments 285 The Choice of Entry Mode 286 Exporting 286 9 Licensing 287 9 Franchising 288 9 Joint Ventures 289 9 Wholly Owned Subsidiaries 290 9 Choosing an Entry Strategy 291 Global Strategic Alliances 293 Advantages of Strategic Alliances 293 Strategy in Action 8.3: Cisco and Fujitsu 294 Disadvantages of Strategic Alliances 294 9 Making Strategic Alliances Work 295 Summary of Chapter 298 9 Discussion Questions 299 Practicing Strategic Management 299 Small-Group Exercise: Developing a Global Strategy • Article File 8 • Strategic Management Project: Module 8 • Ethics Exercise Closing Case: The Evolution of Strategy at Procter & Gamble 300
Corporate-Level Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing Opening Case: Oracle Strives to Become the Biggest and the Best 302 Overview 303 Corporate-Level Strategy and the Multibusiness Model 304 Horizontal Integration: Single-Industry Strategy 305 Benefits of Horizontal Integration 307 Running Case: Beating Dell: Why HP Acquired Compaq 308 Problems with Horizontal Integration 310 Strategy in Action 9.1: Horizontal Integration in Health Care 311 Vertical Integration: Entering New Industries to Strengthen the Core Business Model 312 Increasing Profitability Through Vertical Integration 314
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Strategy in Action 9.2: Specialized Assets and Vertical Integration in the Aluminum Industry 316 Problems with Vertical Integration 317 9 The Limits of Vertical Integration 318 Alternatives to Vertical Integration: Cooperative Relationships 319 Short-Term Contracts and Competitive Bidding 319 9 Strategic Alliances and Long-Term Contracting 320 Strategy in Action 9.3: DaimlerChrysler's U.S. Keiretsu 321 Building Long-Term Cooperative Relationships 322 Strategic Outsourcing 323 Benefits of Outsourcing 325 9 Risks of Outsourcing 326 Summary of Chapter 327 9 Discussion Questions 328 Practicing Strategic Management 328 Small-Group Exercise: Comparing Vertical Integration Strategies • Article File 9 • Strategic Management Project: Module 9 • Ethics Exercise Closing Case: Read All About It News Corp. 329
10
Corporate-Level Strategy: Formulating and Implementing Related and Unrelated Diversification Opening Case: Tyco's Rough Ride 331 Overview 332 Expanding Beyond a Single Industry 333 A Company as a Portfolio of Distinctive Competencies 333 Increasing Profitability Through Diversification 335 Transferring Competencies Across Industries 336 9 Leveraging Competencies 337' Strategy in Action lO.l: Diversification at 3M: Leveraging Technology 338 Sharing Resources: Economies of Scope 339 9 Using Product Bundling 340 9 Managing Rivalry: Multipoint Competition 340 9 Utilizing General Organizational Competencies 341 Two Types of Diversification 343 Related Diversification 344 9 Unrelated Diversification 344 Strategy in Action 10.2: Related Diversification at Intel 345 Disadvantages and Limits of Diversification 346 Changing Industry- and Firm-Specific Conditions 346 9 Diversification for the Wrong Reasons 346 9 The Bureaucratic Costs of Diversification 347 Choosing a Strategy 349 Related Versus Unrelated Diversification 349 9 The Web of Corporate-Level Strategy 350 Entering New Industries: Internal New Ventures 351 The Attraction of Internal New Venturing 351 9 Pitfalls of New Ventures 352 9 Guidelines for Successful Internal New Venturing 353 Entering New Industries: Acquisitions 354 The Attractions of Acquisitions 355 9 Acquisition Pitfalls 355 Strategy in Action IO.3: Postacquisition Problems at Mellon Bank 357 Guidelines for Successful Acquisition 358 Entering New Industries: Joint Ventures 360 Restructuring 361 Why Restructure? 361 Summary of Chapter 362 9 Discussion Questions 362
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Contents Practicing Strategic Management 363 Small-Group Exercise: Dun & Bradstreet 9 Article File 10 • Strategic Management Project: Module 10 • Ethics Exercise Closing Case: United Technologies Has an "ACE in Its Pocket" 364
Part 4
Implementing Strategy
11
Corporate Performance, Governance, and Business Ethics
366
Opening Case: The Rise and Fall of Dennis Kozlowski 366 Overview 367 Stakeholders and Corporate Performance 367 Stakeholder Impact Analysis 36"8 • The Unique Role of Stockholders 368 9 Profitability, Profit Growth, and Stakeholder Claims 369 Strategy in Action l l . l : Price Fixing at Sotheby's and Christie's 371 Agency Theory 372 Principal-Agent Relationships 372 9 The Agency Problem 372 Strategy in Action 11.2: Self-Dealing at Computer Associates 376 Governance Mechanisms 377 The Board of Directors 377 9 Stock-Based Compensation 379 9 Financial Statements and Auditors 380 9 The Takeover Constraint 380 9 Governance Mechanisms Inside a Company 381 Ethics and Strategy 384 Ethical Issues in Strategy 384 Strategy in Action 11.3: Nike and the Sweatshop Debate 385 The Roots of Unethical Behavior 388 9 The Philosophical Approaches to Ethics 389 9 Behaving Ethically 392 Running Case: Dell's Code of Ethics 394 Summary of Chapter 396 9 Discussion Questions 397 Practicing Strategic Management 397 Small-Group Exercise: Evaluating Stakeholder Claims • Article File 11 • Strategic Management Project: Module 11 • Ethics Exercise Closing Case: Working Conditions at Wal-Mart 399
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Implementing Strategy in Companies That Compete in a Single Industry
401
Opening Case: Strategy Implementation at Dell Computer 401 Overview 402 Implementing Strategy Through Organizational Design 403 Building Blocks of Organizational Structure 404 Grouping Tasks, Functions, and Divisions 404 • Allocating Authority and Responsibility 405 Strategy in Action 12.1: Union Pacific Decentralizes to Increase Customer Responsiveness 408 Integration and Integrating Mechanisms 409 Strategic Control Systems 409 Levels of Strategic Control 411 9 Types of Strategic Control Systems 411 9 Using Information Technology 414 Strategy in Action 12.2: Control at Cypress Semiconductor 415 Strategic Reward Systems 415
Contents
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Organizational Culture 416 Culture and Strategic Leadership 417 9 Traits of Strong and Adaptive Corporate Cultures 417 Strategy in Action 12.3: How Ray Kroc Established McDonald's Culture 418 Building Distinctive Competencies at the Functional Level 419 Functional Structure: Grouping by Function 419 9 The Role of Strategic Control 420 9 Developing Culture at the Functional Level 421 9 Functional Structure and Bureaucratic Costs 423 9 The Outsourcing Option 424 Implementing Strategy in a Single Industry 425 Implementing Cost Leadership 426 9 Implementing Differentiation 427 9 Product Structure: Implementing a Wide Product Line 428 9 Market Structure: Increasing Responsiveness to Customer Groups 429 9 Geographic Structure: Expanding Nationally 429 9 Matrix and Product-Team Structures: Competing in Fast-Changing, High-Tech Environments 431 9 Focusing on a Narrow Product Line 433 Strategy in Action 12.4: Restructuring at Lexmark 434 Restructuring and Reengineering 435 Summary of Chapter 437 9 Discussion Questions 438 Practicing Strategic Management 438 Small-Group Exercise: Deciding on an Organizational Structure Management Project: Module 12 • Ethics Exercise Closing Case: Nokia's New Product Structure 440
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Article File 12
Implementing Strategy in Companies That Compete Across Industries and Countries
9
Strategic
442
Opening Case: Ford Has a New CEO and a New Global Structure 442 Overview 443 Managing Corporate Strategy Through the Multidivisional Structure 444 Advantages of a Multidivisional Structure 447 9 Problems in Implementing a Multidivisional Structure 448 9 Structure, Control, Culture, and Corporate-Level Strategy 450 9 The Role of Information Technology 453 Strategy in Acton 13.I: SAP's ERP Systems 454 Implementing Strategy Across Countries 455 Implementing a Localization Strategy 456 9 Implementing an International Strategy 457 9 Implementing a Global Standardization Strategy 458 9 Implementing a Transnational Strategy 459 Strategy in Action 13.2: Using IT to Make Nestles Global Structure Work 460 Entry Mode and Implementation 462 Internal New Venturing 462 9 Joint Venturing 465 9 Mergers and Acquisitions 466 Information Technology, the Internet, and Outsourcing 467 Information Technology and Strategy Implementation 468 Strategy in Action 13.3: Oracle's New Approach to Control 469 Strategic Outsourcing and Network Structure 470 Strategy in Action 13.4: Li & Fung's Global Supply-Chain Management 471 Summary of Chapter 472 9 Discussion Questions 473 Practicing Strategic Management 473 Small-Group Exercise: Deciding on an Organizational Structure • Article File 13 • Strategic Management Project: Module 13 • Ethics Exercise Closing Case: GM Searches for the Right Global Structure 474 Endnotes 477 Box Source Notes 493
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Contents
Appendix: Analyzing a Case Study and Writing a Case Study Analysis What Is a Case Study Analysis? Cl Analyzing a Case Study C2 Writing a Case Study Analysis C6 The Role of Financial Analysis in Case Study Analysis C8 Profit Ratios C8 9 Liquidity Ratios C9 9 Activity Ratios 9 Shareholder-Return Ratios Cll 9 Cash Flow C12 Conclusion C12 Index
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CIO
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Leverage Ratios
Ci
CIO
