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Essentials of

Strategic Management

Charles W. L. HillUniversity of Washington

Gareth R. JonesTexas A&M University

3rd Edition

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Essentials of Strategic Management, Third EditionCharles W. L. Hill, Gareth R. Jones

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Brief Contents

iii

PART ONE INTRODUCTION TO STRATEGIC MANAGEMENT

1 The Strategy- Making Process 12 Stakeholders, The Mission, Governance, and Business Ethics 27

PART TWO THE NATURE OF COMPETITIVE ADVANTAGE

3 External Analysis: The Identifi cation of Opportunities and Threats 55

4 Building Competitive Advantage 83

PART THREE BUILDING AND SUSTAINING LONG-RUN COMPETITIVE ADVANTAGE

5 Business- Level Strategy and Competitive Positioning 1176 Strategy in the Global Environment 1457 Corporate- Level Strategy and Long- Run Profi tability 172

PART FOUR STRATEGY IMPLEMENTATION

8 Strategic Change: Implementing Strategies to Build and Develop a Company 200

9 Implementing Strategy Through Organizational Design 226

iv Contents

Contents

Preface xi

PART ONE INTRODUCTION TO STRATEGIC MANAGEMENT

Chapter 1 The Strategy- Making Process 1

Competitive Advantage and Superior Performance 2

Running Case: Walmart’s Competitive Advantage 3

Strategic Managers 5Corporate- Level Managers 6Business- Level Managers 6Functional- Level Managers 7

The Strategy- Making Process 7A Model of the Strategic Planning Process 7The Feedback Loop 11

Strategy as an Emergent Process 11Strategy Making in an Unpredictable World 11Autonomous Action: Strategy Making by Lower- Level Managers 12Serendipity and Strategy 12

Strategy in Action 1.1: A Strategic Shift at Microsoft 13

Intended and Emergent Strategies 14Strategic Planning in Practice 15

Scenario Planning 15Decentralized Planning 16

Strategic Decision Making 17Cognitive Biases 17Improving Decision Making 18

Strategic Leadership 19Vision, Eloquence, and Consistency 19Commitment 20Being Well Informed 20Willingness to Delegate and Empower 20The Astute Use of Power 21Emotional Intelligence 21

Practicing Strategic Management 23

Closing Case: Planning for the Chevy Volt 24

iv

Contents v

Chapter 2 Stakeholders, The Mission, Governance, and Business Ethics 27

Stakeholders 28The Mission Statement 29

The Mission 30Vision 31Values 32Major Goals 32

Corporate Governance and Strategy 33The Agency Problem 34

Strategy In Action 2.1: The Agency Problem at Tyco 35

Governance Mechanisms 38Ethics and Strategy 42

Ethical Issues in Strategy 42

Running Case: Working Conditions at Walmart 45

The Roots of Unethical Behavior 46Behaving Ethically 47Final Words 49

Practicing Strategic Management 51

Closing Case: Google’s Mission, Ethical Principles, and Involvement in China 52

PART TWO THE NATURE OF COMPETITIVE ADVANTAGE

Chapter 3 External Analysis: The Identifi cation of Opportunities and Threats 55

Analyzing Industry Structure 56Risk of Entry by Potential Competitors 58

Strategy in Action 3.1: Circumventing Entry Barriers into the Soft Drink Industry 59

Rivalry among Established Companies 61The Bargaining Power of Buyers 63The Bargaining Power of Suppliers 64Substitute Products 65Porter’s Model Summarized 66

Strategic Groups within Industries 66

Running Case: Walmart’s Bargaining Power over Suppliers 67

Implications of Strategic Groups 68

vi Contents

The Role of Mobility Barriers 69Industry Life Cycle Analysis 69

Embryonic Industries 70Growth Industries 70Industry Shakeout 71Mature Industries 72Declining Industries 72Summary 73

The Macroenvironment 73Macroeconomic Forces 73Global Forces 75Technological Forces 75Demographic Forces 75Social Forces 76Political and Legal Forces 76

Practicing Strategic Management 78

Closing Case: The Pharmaceutical Industry 79

Chapter 4 Building Competitive Advantage 83

Competitive Advantage: Value Creation, Low Cost, and Differentiation 84The Generic Building Blocks of Competitive Advantage 86

Effi ciency 87Quality as Excellence and Reliability 88Innovation 89Customer Responsiveness 90

The Value Chain 90Primary Activities 91Support Activities 92

Functional Strategies and The Generic Building Blocks of Competitive Advantage 93

Increasing Effi ciency 93

Strategy in Action 4.1: Learning Effects in Cardiac Surgery 95

Running Case: Human Resource Strategy and Productivity at Walmart 99

Increasing Quality 100Increasing Innovation 103Achieving Superior Customer Responsiveness 106

Distinctive Competencies and Competitive Advantage 108Resources and Capabilities 108The Durability of Competitive Advantage 110

Practicing Strategic Management 112

Closing Case: Starbucks 113

Contents vii

PART THREE BUILDING AND SUSTAINING LONG-RUN COMPETITIVE ADVANTAGE

Chapter 5 Business- Level Strategy and Competitive Positioning 117

The Nature of Competitive Positioning 118Customer Needs and Product Differentiation 118Customer Groups and Market Segmentation 119Distinctive Competencies 119

Running Case: Walmart’s Business Model and Competitive Positioning 120

Choosing a Business- Level Strategy 120Cost- Leadership Strategy 121Differentiation Strategy 122Cost Leadership and Differentiation 124Focus Strategy 125Stuck in the Middle 128

Competitive Positioning in Different Industry Environments 129Strategies in Fragmented and Growing Industries 129Strategy in Mature Industries 131Strategies in Declining Industries 137

Practicing Strategic Management 141

Closing Case: Nike’s Business- Level Strategies 142

Chapter 6 Strategy in the Global Environment 145

The Global Environment 146Increasing Profi tability through Global Expansion 148

Expanding the Market: Leveraging Products and Competencies 148Realizing Economies of Scale 149Realizing Location Economies 149

Running Case: Walmart’s Global Expansion 150

Leveraging the Skills of Global Subsidiaries 152Cost Pressures and Pressures for Local Responsiveness 152

Pressures for Cost Reductions 153Pressures for Local Responsiveness 154

Choosing a Global Strategy 156Global Standardization Strategy 156Localization Strategy 157

Strategy in Action 6.1: The Evolution of Strategy at Procter & Gamble 158

Transnational Strategy 159International Strategy 159Changes in Strategy Over Time 160

viii Contents

Choices of Entry Mode 161Exporting 161Licensing 162Franchising 163Joint Ventures 164Wholly Owned Subsidiaries 165Choosing an Entry Strategy 166

Practicing Strategic Management 169

Closing Case: IKEA— The Global Retailer 169

Chapter 7 Corporate- Level Strategy and Long- Run Profi tability 172

Concentration on a Single Industry 173Horizontal Integration 174Benefi ts and Costs of Horizontal Integration 175

Running Case: Walmart’s Growing Chain of “Neighborhood Markets” 176

Outsourcing Functional Activities 178Vertical Integration 180

Arguments for Vertical Integration 182Arguments against Vertical Integration 184Vertical Integration and Outsourcing 186

Entering New Industries Through Diversifi cation 186Creating Value Through Diversifi cation 187

Strategy in Action 7.1: Diversifi cation at 3M: Leveraging Technology 190

Related versus Unrelated Diversifi cation 191Restructuring and Downsizing 192

Why Restructure? 193Exit Strategies 194

Practicing Strategic Management 196

Closing Case: United Technologies Has an “ACE in Its Pocket” 197

PART FOUR STRATEGY IMPLEMENTATION

Chapter 8 Strategic Change: Implementing Strategies to Build and Develop a Company 200

Strategic Change 201Types of Strategic Change 201A Model of the Change Process 202

Analyzing a Company as a Portfolio of Core Competencies 205Fill in the Blanks 206Premier Plus 10 207

Contents ix

White Spaces 207Mega- Opportunities 207

Implementing Strategy Through Internal New Ventures 208Pitfalls with Internal New Ventures 209Guidelines for Successful Internal New Venturing 211

Implementing Strategy Through Acquisitions 212Pitfalls with Acquisitions 213Guidelines for Successful Acquisition 214

Implementing Strategy Through Strategic Alliances 215

Strategy in Action 8.1: News Corp’s Successful Acquisition Strategy 216

Advantages of Strategic Alliances 217Disadvantages of Strategic Alliances 217Making Strategic Alliances Work 218

Practicing Strategic Management 222

Closing Case: Oracle’s Growing Portfolio of Businesses 223

Chapter 9 Implementing Strategy Through Organizational Design 226

The Role of Organizational Structure 227Building Blocks of Organizational Structure 228

Vertical Differentiation 229Problems with Tall Structures 230Centralization or Decentralization? 232

Strategy in Action 9.1: To Centralize or Decentralize? That Is the Question 233

Horizontal Differentiation 234Functional Structure 234Product Structure 236Product- Team Structure 237Geographic Structure 238Multidivisional Structure 240

Integration and Organizational Control 244Forms of Integrating Mechanisms 244Differentiation and Integration 247

The Nature of Organizational Control 247Strategic Controls 248Financial Controls 250Output Controls 251Behavior Control 252

Running Case: How Sam Walton Created Walmart’s Culture 255

Practicing Strategic Management 257

Closing Case: Strategy Implementation at Dell Computer 258

x Contents

Introduction: Analyzing a Case Study and Writing a Case Study Analysis C1

What Is Case Study Analysis?Analyzing a Case StudyWriting a Case Study AnalysisThe Role of Financial Analysis in Case Study Analysis

Profi t RatiosLiquidity RatiosActivity RatiosLeverage RatiosShareholder-Return RatiosCash Flow

Conclusion

Cases

Analyzing a Case Study and Writing a Case Study Analysis C1

Section A: Business Level Cases: Domestic and Global

Case 1: Apple in 2008 C13

Case 2: SGI versus Dell: Competition in Server and Cloud Computing C27

Case 3: The Home Video Game Industry: Atari Pong to the Nintendo Wii C35

Case 4: McDonald’s and Its Critics: 1973–2009 C53

Case 5: The Global Automobile Industry in 2009 C66

Case 6: General Motors: From Birth to Bankruptcy in 2009 C78

Section B: Corporate Level Cases: Domestic and Global

Case 7: IKEA: Furniture Retailer to the World C90

Case 8: The Rise of IBM C98

Case 9: The Fall of IBM C109

Case 10: IBM in 2009 C122

Index I1

Preface

In framing and writing Essentials of Strategic Management, our goal is to inform and familiarize students with what strategic management means to today’s global world. Often people are unaware of how the strategy-making process affects them. We are all used to going to work and going into companies such as restaurants, stores, and banks, and buying the goods and services we need to satisfy our many needs. However, the actual strategic management activities and processes that are re-quired to make these goods and services available to us commonly go unappreciated. Similarly, we might know that companies exist to make a “profi t,” but what is profi t, how is it created, and what is profi t used for? Moreover, what are the actual strategic management activities involved in the creation of goods and services, and why is it that some companies seem to be more effective and more “profi table” than others?

Essentials of Strategic Management, Third Edition, has been structured and writ-ten to address these issues. The goal of this revision is to explain in a clear, com-prehensive, but concise way why strategic management is important to people, the companies they work for, and the society in which they live. Our objective in writing this book has been to provide the overall “big picture” of what strategic manage-ment is, what strategic managers do, and how the strategy-making process affects company performance. The book provides a focused, integrated approach that gives students a solid understanding of the nature, functions, and main building blocks of strategic management.

Organization of the Book

The book presents a broad overview of the nature and functions of strategic man-agement in nine chapters. Part 1, Introduction to Strategic Management, explains what strategic management is and provides a framework to understand what strate-gic managers do. Chapter 1 discusses the relationship between strategic management and strategic leadership and shows how competitive advantage results in superior performance. It also describes the plan of this book and discusses the principal func-tions of strategic managers. Chapter  2 discusses the way companies affect their stakeholders, and why it is necessary to create corporate governance mechanisms that ensure strategic managers work to further the interests of stakeholders and behave ethically.

In Part  2, The Nature of Competitive Advantage, we discuss the factors and forces both external and internal to an organization that determine its choice of strategies to create a competitive advantage and achieve above-average profi tability. Chapter  3 discusses opportunities, threats, and competition in the external envi-ronment. Chapter 4 examines how a company can build competitive advantage by achieving superior effi ciency, quality, innovation, and responsiveness to customers. It also discusses how managers can craft functional-level strategies that will allow an organization to achieve these goals.

xi

xii Preface

In Part 3, Building and Sustaining Long-Run Competitive Advantage, we provide a streamlined discussion of the different level of strategy that must be developed to build and sustain a long-term competitive advantage. Chapter 5 discusses how to use business-level strategies to optimize competitive positioning and outperform industry rivals. Chapter  6 discusses how to strengthen competitive advantage by expanding globally into new national markets. Chapter 7 then examines the various corporate-level strategies such as vertical integration, diversifi cation, and outsourc-ing that are used to protect and strengthen competitive advantage and sustain long-run profi tability.

Part  4, Strategy Implementation, we examine the many operational issues in-volved in putting all these strategies into action simultaneously. Chapter  8 fi rst discusses the importance of strategic change in today’s fast-changing global envi-ronment and the issues and problems involved in managing the change process ef-fectively. Then, it outlines how to build and develop a company’s business through the use of internal new venturing, acquisitions, and strategic alliances and considers the pros and cons of these different methods. Chapter 9 discusses how to implement strategy through the design of organizational structure and the operational issues involved in selecting structures to match the needs of particular strategies. It also discusses the organizational control systems necessary to fi t strategy to structure and the role of organizational culture in developing competitive advantage.

And, fi nally, in Part 5 we provide a collection of cases that will appeal to students and instructors alike. We selected cases based both on the intrinsically interesting and timely topics, such as the global auto industry and the gaming industry, and the strategic management issues they illuminate. Through the cases and the guidelines on analyzing a case, students can further investigate the successes and challenges presented throughout the strategic management process. All ten cases are new to this edition and strive to introduce students to well-known global corporations such as Apple, Dell, McDonald’s, IKEA, and IBM.

As you can see by perusing the table of contents, our essentials book parallels the approach we take in our other book, Strategic Management: An Integrated Approach. Our goal is to offer a contemporary, integrated account of strategic man-agement, but one that is streamlined and focused only on the essentials of this com-plex and fascinating subject.

Learning Features

Nothing makes the practice of strategic management come alive more than vivid sto-ries and examples about people and companies that demonstrate clearly the meaning of the chapter material. Hands-on exercises offer students the opportunity to ac-tively think about and engage in strategic management issues and decision making. This book pays considerable attention to creating and developing both in-chapter and end-of-chapter features and exercises to offer the most learning value to stu-dents while economizing on their valuable learning time.

Each chapter contains Strategy in Action insight boxes that have been carefully selected and written to raise students’ interest and are integrated seamlessly into the text so as not to disrupt its fl ow. Many books have examples that disrupt students’ thought processes or distract them with enormous amounts of unnecessary detail; this book avoids these pitfalls.

Preface xiii

Each chapter also contains a Running Case featuring Walmart as the focus cor-poration. In this edition, the Running Case examples illustrating continuous real-world changes in strategic management practices such as the increased use of cost reduction strategies like global outsourcing, ethical issues, and lean production are at the heart of the revision.

In midst of ever-present corporate scandals and economic turbulence, educators are faced with the critical and diffi cult task of teaching ethical decision-making prac-tices. As an instructional tool to broach this task, each chapter contains the new mar-ginal feature—Ethical Dilemma—that asks students to make sound management decisions while considering ethical ramifi cations in business.

The end-of-chapter learning features contained in Practicing Strategic Management are composed of exercises designed to offer additional insight into the chapter material to build students’ learning experience. They are designed to create lively discussion either at the level of the whole class, or in small groups, or at the individual level. In practice, an instructor will have to decide which of these exercises to select and use in any particular class period or which to use as homework assign-ments. Frequently, instructors fi nd that varying the particular exercises they use over the semester is the best way to engage students.

• Discussion Questions. A set of chapter-related questions and points for refl ec-tion, some of which ask students to research actual management issues and learn fi rsthand from practicing managers.

• Small-Group Exercise. This exercise is designed to allow instructors to utilize interac-tive experiential exercises in groups of three to four students. Each chapter contains a chapter-related issue guaranteed to lead to debate among students. The instructor calls on students to break up into small groups—simply by turning to people around them—and all students participate in the exercise in class. A mechanism is provided for the different groups to share what they have learned with each other.

• Exploring the Web. This exercise asks the student to visit the Web site of a com-pany and then to use the information contained on that Web site to answer a series of chapter-related questions.

• Closing Case. Each chapter ends with a short case that can be used for further analysis of chapter issues. They have been carefully chosen to refl ect contem-porary issues and problems in strategic management, and to offer further in-formation on chapter issues. The accompanying discussion questions encourage students to read about and to analyze how managers approach real problems in the strategic management world.

Teaching and Learning Aids

For the Instructor

• The Instructor’s Resource Manual (available on the IRCD or via the password-protected instructor Web site): For each chapter, we provide a clearly focused synopsis, a list of teaching objectives, a comprehensive lecture outline, teaching notes for the Ethical Dilemma feature, suggested answers to discussion questions, and comments on the end-of-chapter activities. Each Opening Case, Strategy in Action boxed feature, and Closing Case has a synopsis and a corresponding teaching note to help guide class discussion.

xiv Preface

• ExamView Test Bank (available on the IRCD) offers a set of comprehensive true/false, multiple-choice, and essay questions for each chapter in the book. The mix of questions has been adjusted to provide fewer fact-based of simple memoriza-tion items and to provide more items that rely on synthesis or application. Every question contains AACSB standardized tags, is keyed to text Learning Objective, includes an answer, and text page reference.

• Case Teaching Notes (available on the IRCD or via the password protected instruc-tor website) include a complete list of case discussion questions as well as a compre-hensive teaching note for each case, which gives a complete analysis of case issues.

• PowerPoint (available on the IRCD or via the password-protected instructor Web site) offer value to enhance your in-class lecture.

• DVD program highlights many issues of interest and can be used to spark class dis-cussion. It features extensive footage from “The Age of Walmart” series, CNBC’s “Innovate or Die,” “The Execution Plan,” as well as other highly valuable seg-ments that will enrich your students’ understanding and learning experience.

• Online Resources: To access the online course materials, including CourseMate (the text-specifi c Web site), visit www.cengagebrain.com. At the CengageBrain.com home page, search for the ISBN of your title (from the back cover of your book) using the search box at the top of the page. This will take you to the prod-uct page where these resources can be found.

Specifi c online resources to aid instructors include, the Instructor’s Manual, a DVD guide, instructor-based PowerPoint, and access to the student protected resources.

• WebTutor: Jumpstart your course with customizable, rich text specifi c content within your Course Management System! • Jumpstart—Instructors simply load a WebTutor cartridge or epack into their

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WebTutor delivers! Visit cengage.com/TeamUp/webtutor to learn more.• Simulations: Would you like to fi nd a more creative way to have your students ap-

ply the concepts of Strategic Management? Take a moment to review one of our simulation options for Strategic Management and see where the rubber meets the road! Our simulations offer students the ability to fully run a company by making key decisions, experiencing issues, and adjust their strategy based on the competi-tion and the market. It’s an excellent way to fully immerse them in the content of the course by having them experience the challenges and successes of business owners everywhere. Contact your Cengage representative for details and a demonstration.

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Preface xv

For the Student

• CourseMate: Engaging, trackable, and affordable, the new Understanding Business Strategy CourseMate Web site offers a dynamic way to bring course concepts to life with interactive learning, study, and exam preparation tools that support this printed edition of the text. Watch comprehension soar with all-new fl ash cards, engaging games, streaming videos, and more in this textbook-specifi c Web site. A complete e-book provides the choice of an entire online learning experience. CourseMate goes beyond the book to deliver what you need!

• CengageBrain.com: Cengage Learning is excited to offer CengageBrain.com. Students can choose to purchase the format that suits them best—print or digital—and experience substantial savings options, including our new textbook rental. To access additional course materials and companion resources, please visit the home page and enter the ISBN of your title (from the back cover) using the search box at the top of the page. This will take you to the product page where these resources can be found.

Acknowledgments

Finding a way to integrate and present an overview of the rapidly changing world of strategic management and strategic management activities and make it interesting and meaningful for students is not an easy task. In writing Essentials of Strategic Management, we have been fortunate to have had the assistance of several people who contributed greatly to the book’s fi nal form.

We are indebted to the many colleagues and reviewers who provided us with useful and detailed feedback, perceptive comments, valuable suggestions for improv-ing the manuscript. As well as those individuals have helped create and shape our support package.

Kevin Banning, Auburn UniversityRobert D’Intino, Rowan UniversityScott Droege, Western Kentucky UniversityDeborah Francis, Brevard CollegeSanjay Goel, University of MinnesotaLeslie Haugen, University of St. ThomasTodd Hostager, University of Wisconsin–Eau ClaireJohn Humphreys, Eastern New Mexico UniversityDeborah Johnson, Franklin UniversityKevin L. Johnson, Baylor UniversityElene Kent, Capital UniversitySubodh Kulkarni, Howard UniversityKamalesh Kumar, University of Michigan–DearbornPaul Mallette, Colorado State UniversityJosetta McLaughlin, Roosevelt UniversityTom Morris, Radford UniversityDavid Olson, California State–Bakersfi eldWilliam Ritchie, Florida Gulf Coast UniversityTim Rogers, Ozarks Technical CollegeStuart Rosenberg, Dowling College