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Strategic Management Theory: An Integrated Approach
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Strategic Management
Theory
AN INTEGRATED APPROACH
9th Edition
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Strategic Management
Theory
AN INTEGRATED APPROACH
Charles W. L. Hill
University of Washington
Gareth R. Jones
Texas A&M University
9th Edition
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Library of Congress Control Number: 2009934265
ISBN-13: 978-0-538-75107-0
ISBN-10: 0-538-75107-X
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Strategic Management Theory: An
Integrated Approach, Ninth Edition
Charles W. L. Hill and Gareth R. Jones
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Brief Contents
PART ONE INTRODUCTION TO STRATEGIC
MANAGEMENT
1 Strategic Leadership: Managing the StrategyMaking Process for Competitive Advantage 1
2 External Analysis: The Identifi cation of Opportunities
and Threats 38
PART TWO THE NATURE OF COMPETITIVE ADVANTAGE
3 Internal Analysis: Distinctive Competencies,
Competitive Advantage, and Profi tability 72
4 Building Competitive Advantage Through
Functional-Level Strategy 106
PART THREE STRATEGIES
5 Building Competitive Advantage Through BusinessLevel Strategy 142
6 Business-Level Strategy and the Industry Environment 176
7 Strategy and Technology 209
8 Strategy in the Global Environment 242
9 Corporate-Level Strategy: Horizontal Integration,
Vertical Integration, and Strategic Outsourcing 283
10 Corporate-Level Strategy: Related and Unrelated
Diversifi cation 311
PART FOUR IMPLEMENTING STRATEGY
11 Corporate Performance, Governance,
and Business Ethics 345
12 Implementing Strategy in Companies
That Compete in a Single Industry 378
13 Implementing Strategy in Companies
That Compete across Industries and Countries 421
v
vi Contents
Contents
Preface xix
PART ONE INTRODUCTION TO STRATEGIC MANAGEMENT
Chapter 1 Strategic Leadership: Managing the Strategy-Making
Process for Competitive Advantage 1
Opening Case: Walmart’s Competitive Advantage 1
Strategic Leadership, Competitive Advantage, and Superior Performance 4
Superior Performance 4
Competitive Advantage and a Company’s Business Model 6
Industry Differences in Performance 7
Performance in Nonprofi t Enterprises 8
Strategic Managers 9
Corporate-Level Managers 10
Business-Level Managers 11
Functional-Level Managers 11
The Strategy-Making Process 11
A Model of the Strategic Planning Process 12
Mission Statement 14
Major Goals 16
External Analysis 17
Strategy in Action 1.1: Strategic Analysis at Time Inc. 18
Internal Analysis 19
SWOT Analysis and the Business Model 19
Strategy Implementation 20
The Feedback Loop 21
Strategy as an Emergent Process 21
Strategy Making in an Unpredictable World 21
Autonomous Action: Strategy Making by Lower-Level Managers 22
Strategy in Action 1.2: Starbucks’s Music Business 22
Strategy in Action 1.3: A Strategic Shift at Charles Schwab 23
Serendipity and Strategy 23
Intended and Emergent Strategies 24
Strategic Planning in Practice 26
Scenario Planning 26
Decentralized Planning 27
Strategic Decision Making 28
Cognitive Biases and Strategic Decision Making 28
Techniques for Improving Decision Making 29
Strategic Leadership 30
vi
Contents vii
Vision, Eloquence, and Consistency 30
Articulation of the Business Model 31
Commitment 31
Being Well Informed 32
Willingness to Delegate and Empower 32
The Astute Use of Power 32
Emotional Intelligence 33
Practicing Strategic Management 35
Closing Case: Planning for the Chevy Volt 36
Chapter 2 External Analysis: The Identifi cation
of Opportunities and Threats 38
Opening Case: The United States Steel Industry 38
Defi ning an Industry 40
Industry and Sector 41
Industry and Market Segments 41
Changing Industry Boundaries 42
Porter’s Five Forces Model 42
Risk of Entry by Potential Competitors 43
Strategy in Action 2.1: Circumventing Entry Barriers
into the Soft Drink Industry 45
Rivalry Among Established Companies 46
Strategy in Action 2.2: Price Wars in the Breakfast Cereal Industry 49
The Bargaining Power of Buyers 50
Running Case: Walmart’s Bargaining Power over Suppliers 52
The Bargaining Power of Suppliers 52
Substitute Products 53
A Sixth Force: Complementors 54
Porter’s Model Summarized 54
Strategic Groups within Industries 54
Implications of Strategic Groups 56
The Role of Mobility Barriers 56
Industry Life Cycle Analysis 57
Embryonic Industries 58
Growth Industries 58
Industry Shakeout 58
Mature Industries 59
Declining Industries 60
Industry Life Cycle Summary 60
Limitations of Models for Industry Analysis 61
Life Cycle Issues 61
Innovation and Change 61
Company Differences 63
The Macroenvironment 63
Macroeconomic Forces 64
Global Forces 65
viii Contents
Technological Forces 66
Demographic Forces 66
Social Forces 66
Political and Legal Forces 67
Practicing Strategic Management 69
Closing Case: The United States Beer Industry 70
PART TWO THE NATURE OF COMPETITIVE ADVANTAGE
Chapter 3 Internal Analysis: Distinctive Competencies,
Competitive Advantage, and Profi tability 72
Opening Case: Regaining McDonald’s Competitive
Advantage 72
The Roots of Competitive Advantage 74
Distinctive Competencies 74
Competitive Advantage, Value Creation, and Profi tability 77
The Value Chain 81
Primary Activities 81
Strategy in Action 3.1: Value Creation at Burberry 83
Support Activities 84
Strategy in Action 3.2: Competitive Advantage at Zara 85
The Building Blocks of Competitive Advantage 85
Effi ciency 86
Quality as Excellence and Reliability 86
Innovation 88
Customer Responsiveness 89
Business Models, the Value Chain, and Generic
Distinctive Competencies 90
Analyzing Competitive Advantage and Profi tability 91
Running Case: Comparing Walmart and Target 93
The Durability of Competitive Advantage 95
Barriers to Imitation 96
Capability of Competitors 97
Industry Dynamism 98
Summarizing Durability of Competitive
Advantage 98
Avoiding Failure and Sustaining Competitive
Advantage 99
Why Companies Fail 99
Strategy in Action 3.3: The Road to Ruin at DEC 101
Steps to Avoid Failure 101
Practicing Strategic Management 104
Closing Case: Southwest Airlines 105
Contents ix
Chapter 4 Building Competitive Advantage Through
Functional-Level Strategy 106
Opening Case: Productivity Improvement at
United Technologies 106
Achieving Superior Effi ciency 108
Effi ciency and Economies of Scale 108
Effi ciency and Learning Effects 110
Effi ciency and the Experience Curve 111
Strategy in Action 4.1: Learning Effects in Cardiac Surgery 112
Effi ciency, Flexible Production Systems, and Mass Customization 114
Strategy in Action 4.2: Mass Customization at Lands’ End 116
Marketing and Effi ciency 117
Materials Management, Just-in-Time, and Effi ciency 118
R&D Strategy and Effi ciency 119
Human Resource Strategy and Effi ciency 120
Running Case: Human Resource Strategy and
Productivity at Walmart 121
Information Systems and Effi ciency 122
Infrastructure and Effi ciency 123
Summary: Achieving Effi ciency 123
Achieving Superior Quality 124
Attaining Superior Reliability 125
Strategy in Action 4.3: GE’s Six Sigma Quality
Improvement Process 126
Implementing Reliability Improvement Methodologies 126
Improving Quality as Excellence 128
Achieving Superior Innovation 130
The High Failure Rate of Innovation 131
Reducing Innovation Failures 132
Strategy in Action 4.4: Corning: Learning from
Innovation Failures 134
Achieving Superior Responsiveness to Customers 134
Focusing on the Customer 135
Satisfying Customer Needs 136
Practicing Strategic Management 139
Closing Case: Boosting Effi ciency at Matsushita 140
PART THREE STRATEGIES
Chapter 5 Building Competitive Advantage Through
Business-Level Strategy 142
Opening Case: Sony’s Failure in Competitive Positioning 142
Competitive Positioning and the Business Model 145
x Contents
Formulating the Business Model: Customer Needs and
Product Differentiation 145
Formulating the Business Model: Customer Groups and
Market Segmentation 147
Implementing the Business Model: Building Distinctive
Competencies 150
Running Case: Walmart’s Business Model
and Competitive Positioning 151
Competitive Positioning and Business-Level Strategy 151
Competitive Positioning: Generic Business-Level Strategies 154
Cost Leadership 155
Strategy in Action 5.1: Ryanair Takes Control over the Sky in Europe 157
Focused Cost Leadership 158
Differentiation 161
Focused Differentiation 163
Strategy in Action 5.2: L.L.Bean’s New Business Model 164
The Dynamics of Competitive Positioning 165
Strategy in Action 5.3: Zara Uses IT to Change the World of Fashion 166
Competitive Positioning for Superior Performance:
Broad Differentiation 167
Competitive Positioning and Strategic Groups 168
Strategy in Action 5.4: Toyota’s Goal? A High-Value Vehicle
to Match Every Customer Need 169
Failures in Competitive Positioning 170
Practicing Strategic Management 174
Closing Case: Holiday Inns on Six Continents 174
Chapter 6 Business-Level Strategy and the Industry Environment 176
Opening Case: Competition in the Microchip
Business Speeds Up 176
Strategies in Fragmented Industries 178
Chaining 179
Franchising 180
Horizontal Merger 180
Using Information Technology and the Internet 180
Strategy in Action 6.1: Clear Channel Creates
a National Chain of Local Radio Stations 181
Strategies in Embryonic and Growth Industries 181
The Changing Nature of Market Demand 183
Strategic Implications: Crossing the Chasm 185
Strategic Implications of Market Growth Rates 186
Strategy in Action 6.2: AOL, Prodigy, and the Chasm
between Innovators and the Early Majority 187
Contents xi
Navigating Through the Life Cycle to Maturity 188
Embryonic Strategies 189
Growth Strategies 190
Shakeout Strategies 190
Maturity Strategies 191
Strategy in Mature Industries 192
Strategies to Deter Entry: Product Proliferation, Price
Cutting, and Maintaining Excess Capacity 192
Strategies to Manage Rivalry 195
Strategy in Action 6.3: Nonprice Competitive Strategies
at Nike 200
Strategies in Declining Industries 202
The Severity of Decline 202
Choosing a Strategy 203
Strategy in Action 6.4: How to Make Money in the Vacuum
Tube Business 205
Practicing Strategic Management 207
Closing Case: Warfare in Toyland 207
Chapter 7 Strategy and Technology 209
Opening Case: The Format War in Smartphones 209
Technical Standards and Format Wars 211
Examples of Standards 212
Benefi ts of Standards 213
Establishment of Standards 214
Network Effects, Positive Feedback, and Lockout 215
Strategy in Action 7.1: How Dolby Became the Standard in
Sound Technology 217
Strategies for Winning a Format War 219
Ensure a Supply of Complements 219
Leverage Killer Applications 220
Aggressively Pricing and Marketing 220
Cooperate with Competitors 220
License the Format 221
Costs in High-Technology Industries 222
Comparative Cost Economics 222
Strategic Signifi cance 223
Strategy in Action 7.2: Lowering the Cost of Ultrasound
Equipment Through Digitalization 224
Capturing First-Mover Advantages 225
First-Mover Advantages 226
First-Mover Disadvantages 227
Strategies for Exploiting First-Mover Advantages 228
Technological Paradigm Shifts 231
Paradigm Shifts and the Decline of Established Companies 231
xii Contents
Strategy in Action 7.3: Disruptive Technology in
Mechanical Excavators 235
Strategic Implications for Established Companies 236
Strategic Implications for New Entrants 237
Practicing Strategic Management 239
Closing Case: Blu-Ray versus HD DVD 240
Chapter 8 Strategy in the Global Environment 242
Opening Case: The Evolving Strategy of Coca-Cola 242
The Global and National Environments 244
The Globalization of Production and Markets 245
National Competitive Advantage 246
Strategy in Action 8.1: Finland’s Nokia 247
Increasing Profi tability and Profi t Growth Through
Global Expansion 250
Expanding the Market: Leveraging Products 251
Realizing Cost Economies from Global Volume 251
Running Case: Walmart’s Global Expansion 252
Realizing Location Economies 254
Leveraging the Skills of Global Subsidiaries 255
Cost Pressures and Pressures for Local Responsiveness 256
Pressures for Cost Reductions 257
Pressures for Local Responsiveness 258
Choosing a Global Strategy 260
Global Standardization Strategy 260
Localization Strategy 261
Strategy in Action 8.2: The Evolution of Strategy at Procter & Gamble 262
Transnational Strategy 263
International Strategy 264
Changes in Strategy over Time 265
The Choice of Entry Mode 266
Exporting 266
Licensing 267
Franchising 268
Joint Ventures 269
Wholly Owned Subsidiaries 270
Choosing an Entry Strategy 271
Global Strategic Alliances 273
Advantages of Strategic Alliances 273
Strategy in Action 8.3: Cisco and Fujitsu 274
Disadvantages of Strategic Alliances 275
Making Strategic Alliances Work 275
Practicing Strategic Management 280
Closing Case: MTV Networks: A Global Brand Goes Local 281
Contents xiii
Chapter 9 Corporate-Level Strategy: Horizontal Integration,
Vertical Integration, and Strategic Outsourcing 283
Opening Case: News Corp Forges Ahead 283
Corporate-Level Strategy and the Multibusiness Model 285
Horizontal Integration: Single-Industry Strategy 286
Benefi ts of Horizontal Integration 288
Strategy in Action 9.1: Oracle Strives to Become the Biggest
and the Best 289
Running Case: Walmart’s Growing Chain
of “Neighborhood Markets” 291
Problems with Horizontal Integration 292
Vertical Integration: Entering New Industries to Strengthen the
“Core” Business Model 292
Increasing Profi tability through Vertical Integration 294
Strategy in Action 9.2: Specialized Assets and Vertical Integration
in the Aluminum Industry 296
Strategy in Action 9.3: McDonald’s: A Leader at Vertical Integration 297
Problems with Vertical Integration 298
The Limits of Vertical Integration 299
Alternatives to Vertical Integration: Cooperative Relationships 300
Short-Term Contracts and Competitive Bidding 300
Strategic Alliances and Long-Term Contracting 301
Building Long-Term Cooperative Relationships 302
Strategic Outsourcing 303
Benefi ts of Outsourcing 304
Risks of Outsourcing 306
Practicing Strategic Management 309
Closing Case: Beating Dell: Why HP Acquired Compaq 310
Chapter 10 Corporate-Level Strategy:
Related and Unrelated Diversifi cation 311
Opening Case: Samsung’s Success Depends on Many
Corporate Strategies 311
Increasing Profi tability Through Diversifi cation 313
Transferring Competencies 314
Leveraging Competencies 315
Sharing Resources and Capabilities 316
Using Product Bundling 317
Utilizing General Organizational Competencies 318
Two Types of Diversifi cation 320
Related Diversifi cation 320
Strategy in Action 10.1: Cisco Systems Is Entering Many
New Industries 321
Unrelated Diversifi cation 323
xiv Contents
The Limits and Disadvantages of Diversifi cation 323
Changes in the Industry or Company 323
Diversifi cation for the Wrong Reasons 324
The Bureaucratic Costs of Diversifi cation 325
Choosing a Strategy 327
Related versus Unrelated Diversifi cation 327
Strategy in Action 10.2: United Technologies Has an “ACE”
in Its Pocket 328
The Web of Corporate-Level Strategy 329
Entering New Industries: Internal New Ventures 330
The Attractions of Internal New Venturing 331
Pitfalls of New Ventures 331
Guidelines for Successful Internal New Venturing 333
Entering New Industries: Acquisitions 334
The Attraction of Acquisitions 334
Acquisition Pitfalls 335
Guidelines for Successful Acquisition 337
Entering New Industries: Joint Ventures 339
Restructuring 340
Why Restructure? 340
Practicing Strategic Management 342
Closing Case: Tyco’s Changing Corporate-Level Strategies 343
PART FOUR IMPLEMENTING STRATEGY
Chapter 11 Corporate Performance, Governance,
and Business Ethics 345
Opening Case: The Fall of John Thain 345
Stakeholders and Corporate Performance 347
Stakeholder Impact Analysis 348
The Unique Role of Stockholders 349
Profi tability, Profi t Growth, and Stakeholder Claims 349
Strategy in Action 11.1: Price Fixing at Sotheby’s and Christie’s 352
Agency Theory 352
Principal-Agent Relationships 353
The Agency Problem 353
Governance Mechanisms 356
Strategy in Action 11.2: Self-Dealing at Computer Associates 357
The Board of Directors 358
Stock-Based Compensation 359
Financial Statements and Auditors 360
The Takeover Constraint 361
Governance Mechanisms inside a Company 362
Ethics and Strategy 364
Ethical Issues in Strategy 365