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
75
80
Contents
V
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
109
VI
Contents
Practicing Strategic Management 146
Small-Group Exercise: Identifying Excellence
Module 4 • Ethics Exercise
Closing Case: Verizon Wireless 147
•
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
7
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
302
Contents
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
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
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
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
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
CIO
9
Leverage Ratios
Ci
CIO