Charles W.

L Hill
UNIVERSITY OF WASHINGTON

Gareth R.Jones
TEXAS A&M UNIVERSITY

Houghton Mifflin Company

Boston

NewYork

Contents
Preface xiii

Part 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 PlansChrysler Hits the Wall 37 Appendix to Chapter 1: Enterprise Valuation, ROIC, and Growth 39

External Analysis: The Identification of Opportunities and Threats

41

Part 2

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

75

80

Contents

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

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

Article File 4

Strategic Management Project:

Part 3

Strategies Building Competitive Advantage Through Business-Level Strategy 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

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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 WarBlu-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

262

Open i ng Case: MTVA 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

302

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IX

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

331

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 Corporate Performance, Governance, and Business Ethics 366

11

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

12

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

XI

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

Article File 12

Strategic

Implementing Strategy in Companies That Compete Across Industries and Countries

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

XII

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 II

Ci

CIO

Leverage Ratios

CIO