Strategy simulation competitive dynamics and wintel

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Australia ● Brazil ● Mexico ● Singapore ● United Kingdom ● United States

Strategic ManageMent

A n I n t e g r At e d A p p r oA c h

t h e o r y & c A s e s

cHarLeS W. L. HiLL

University of Washington – Foster School of Business

MeLiSSa a. ScHiLLing

new York University – Stern School of Business

garetH r. JOneS

12e

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Strategic Management: An Integrated Approach, Theory & Cases, 12e Charles W. L. Hill Melissa A. Schilling Gareth R. Jones

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iii

PART ONE iNTROducTiON TO sTRATEgic mANAgEmENT

1 strategic Leadership: Managing the strategy-Making process 2 for competitive Advantage

2 external Analysis: the Identification of opportunities and threats 42

PART TwO THE NATuRE OF cOmPETiTiVE AdVANTAgE

3 Internal Analysis: resources and competitive Advantage 78 4 competitive Advantage through Functional-Level strategies 109

PART THREE sTRATEgiEs

5 Business-Level strategy 146 6 Business-Level strategy and the Industry environment 170 7 strategy and technology 202 8 strategy in the global environment 239 9 corporate-Level strategy: horizontal Integration, Vertical 279

Integration, and strategic outsourcing 10 corporate-Level strategy: related and Unrelated diversification 308

PART FOuR imPLEmENTiNg sTRATEgY

11 corporate governance, social responsibility, and ethics 348 12 Implementing strategy through organization 384

PART FiVE cAsEs iN sTRATEgic mANAgEmENT c-1

glossary g-1 Index I-1

BrieF cOntentS

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iv

iv

cOntentS

preface xiv Acknowledgments xviii dedication xxi

PART ONE iNTROducTiON TO sTRATEgic mANAgEmENT

chapter 1 strategic Leadership: Managing the strategy-Making process for competitive Advantage 2 opening case: the rise of Lululemon 2 overview 4 strategic Leadership, competitive Advantage, and superior performance 5

Superior Performance 5 Competitive Advantage and a Company’s Business Model 7 Industry Differences in Performance 8 Performance in Nonprofit Enterprises 9

strategic Managers 10 Corporate-Level Managers 11 Business-Level Managers 12 Functional-Level Managers 12

the strategy-Making process 13 A Model of the Strategic Planning Process 13 Mission Statement 15

Major goals 17 External Analysis 18

strategy in Action 1.1: strategic Analysis at time Inc. 19 Internal Analysis 20 SWOT Analysis and the Business Model 20 Strategy Implementation 21 The Feedback Loop 22

strategy as an emergent process 22 Strategy Making in an Unpredictable World 22 Autonomous Action: Strategy Making by Lower-Level Managers 23 Serendipity and Strategy 24 Intended and Emergent Strategies 24

strategy in Action 1.2: A strategic shift at charles schwab 25 strategic planning in practice 27

Scenario Planning 27 Decentralized Planning 29

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Contents v

strategic decision Making 29 Cognitive Biases and Strategic Decision Making 30 Techniques for Improving Decision Making 31

strategic Leadership 31 Vision, Eloquence, and Consistency 32 Articulation of the Business Model 32 Commitment 33 Being Well Informed 33 Willingness to Delegate and Empower 33 The Astute Use of Power 34 Emotional Intelligence 34

chapter 2 external Analysis: the Identification of opportunities and threats 42 opening case: competition in the U.s. Market for Wireless telecommunications 42 overview 44 defining an Industry 44 porter’s competitive Forces Model 45

Risk of Entry by Potential Competitors 46 Rivalry Among Established Companies 48

strategy in Action 2.1: circumventing entry Barriers into the soft drink Industry 49 strategy in Action 2.2: price Wars in the Breakfast cereal Industry 52

The Bargaining Power of Buyers 53 The Bargaining Power of Suppliers 54 Substitute Products 55 Complementors 55 Summary: Why Industry Analysis Matters 56

strategic groups Within Industries 57 Implications of Strategic Groups 59 The Role of Mobility Barriers 59

Industry Life-cycle Analysis 60 Embryonic Industries 60 Growth Industries 61 Industry Shakeout 62 Mature Industries 63 Declining Industries 63 Summary 64

Limitations of Models for Industry Analysis 64 Life-Cycle Issues 64 Innovation and Change 65 Company Differences 66

the Macroenvironment 67 Macroeconomic Forces 68 Global Forces 69

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vi Contents

Technological Forces 69 Demographic Forces 69 Social Forces 70 Political and Legal Forces 70

PART TwO THE NATuRE OF cOmPETiTiVE AdVANTAgE

chapter 3 Internal Analysis: resources and competitive Advantage 78 opening case: southwest Airlines 78 overview 80 competitive Advantage 80

Distinctive Competencies 81 Resources 81 Resource Quality: The VRIO Framework 83 Resources and Sustained Competitive Advantage 84

Value creation and profitability 87 the Value chain 90

Primary Activities 91 Support Activities 92

strategy in Action 3.1: Value creation at Burberry 93 strategy in Action 3.2: competitive Advantage at Zara 94

Value-Chain Analysis: Implications 95 the Building Blocks of competitive Advantage 96

Efficiency 97 Quality as Excellence and Reliability 97 Innovation 99 Customer Responsiveness 99

Analyzing competitive Advantage and profitability 100 Comparing Wal-Mart and Target 102

chapter 4 competitive Advantage through Functional-Level strategies 109 opening case: trouble at Mcdonald’s 109 overview 111 Achieving superior efficiency 111

Efficiency and Economies of Scale 112 Efficiency and Learning Effects 113

strategy in Action 4.1: Learning effects in cardiac surgery 114 Efficiency and the Experience Curve 115 Efficiency, Flexible Production Systems, and Mass Customization 117

strategy in Action 4.2: pandora: Mass customizing Internet radio 119 Marketing and Efficiency 120

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Contents viiContents

Materials Management, Just-in-time systems, and efficiency 121 Research and Development Strategy and Efficiency 122 Human Resource Strategy and Efficiency 123 Hiring Strategy 123 Employee Training 123 Pay for Performance 124 Information Systems and Efficiency 124 Infrastructure and Efficiency 125 Summary 125

Achieving superior Quality 126 Attaining Superior Reliability 127 Implementing Reliability Improvement Methodologies 127

strategy in Action 4.3: general electric’s six sigma Quality Improvement process 128

Improving Quality as Excellence 130 Achieving superior Innovation 132

The High Failure Rate of Innovation 133 Reducing Innovation Failures 134

Achieving superior cUstoMer responsiveness 136 Focusing on the Customer 136 Demonstrating Leadership 136 Shaping Employee Attitudes 136 Knowing Customer Needs 137 Satisfying Customer Needs 137 Customization 137 Response Time 138

PART THREE sTRATEgiEs

chapter 5 Business-Level strategy 146 opening case: Virgin America 146 overview 148 Low cost and differentiation 148

Lowering Costs 148 Differentiation 149 The Differentiation–Low Cost Tradeoff 151 Value Innovation: Greater Differentiation at a Lower Cost 153

strategy in Action 5.1: IKeA: Value Innovation in Furniture retailing 154 Who Are our customers? Market segmentation 155

Three Approaches to Market Segmentation 155 Market Segmentation, Costs and Revenues 156

Business-Level strategy choices 158

strategy in Action 5.2: Microsoft office Versus google Apps 160 Business-Level strategy, Industry, and competitive Advantage 161

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viii Contents

Implementing Business-Level strategy 162 Lowering Costs Through Functional Strategy and Organization 163 Differentiation Through Functional-Level Strategy and Organization 163

competing differently: Blue ocean strategy 164

chapter 6 Business-Level strategy and the Industry environment 170 opening case: can Best Buy survive the rise of e-commerce? 170 overview 173 strategy in a Fragmented Industry 173

Reasons for Fragmentation 173 Consolidating a Fragmented Industry Through Value Innovation 174 Chaining and Franchising 175 Horizontal Mergers 176

strategies in embryonic and growth Industries 177 The Changing Nature of Market Demand 178 Strategic Implications: Crossing the Chasm 181

strategy in Action 6.1: crossing the chasm in the smartphone Market 182

Strategic Implications of Differences in Market Growth Rates 183 strategy in Mature Industries 185

Strategies to Deter Entry 185 Strategies to Manage Rivalry 188

strategy in Action 6.2: toyota Uses Market development to Become the global Leader 192 strategies in declining Industries 194

The Severity of Decline 194 Choosing a Strategy 195

chapter 7 strategy and technology 202 opening case: Blu-ray Versus hd-dVd and streaming: standards Battles in Video 202 overview 204 technical standards and Format Wars 205

strategy in Action 7.1: “segment Zero”—A serious threat to Microsoft? 206

Examples of Standards 208 Benefits of Standards 209 Establishment of Standards 210 Network Effects, Positive Feedback, and Lockout 211

strategies for Winning a Format War 214 Ensure a Supply of Complements 214 Leverage Killer Applications 215 Aggressive Pricing and Marketing 215 Cooperate with Competitors 216 License the Format 216

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Contents ixContents

costs in high-technology Industries 217 Comparative Cost Economics 217 Strategic Significance 218

strategy in Action 7.2: Lowering the cost of Ultrasound equipment through digitalization 219 capturing First-Mover Advantages 220

First-Mover Advantages 221 First-Mover Disadvantages 222 Strategies for Exploiting First-Mover Advantages 223

technological paradigm shifts 226 Paradigm Shifts and the Decline of Established Companies 227 Strategic Implications for Established Companies 231 Strategic Implications for New Entrants 232

chapter 8 strategy in the global environment 239 opening case: the globalization of starbucks 239 overview 241 global and national environments 242

The Globalization of Production and Markets 242 National Competitive Advantage 243

global expansion, profitability, and profit growth 246 Expanding the Market: Leveraging Products 247 Realizing Cost Economies from Global Volume 247 Realizing Location Economies 248 Leveraging the Competencies of Global Subsidiaries 249

cost pressures and pressures for Local responsiveness 250 Pressures for Cost Reductions 251 Pressures for Local Responsiveness 252

strategy in Action 8.1: Local responsiveness at MtV networks 253 choosing a global strategy 255

Global Standardization Strategy 256 Localization Strategy 257 Transnational Strategy 258 International Strategy 259 Changes in Strategy over Time 259

strategy in Action 8.2: the evolving strategy of coca-cola 261 the choice of entry Mode 262

Exporting 262 Licensing 263 Franchising 264 Joint Ventures 265 Wholly Owned Subsidiaries 266 Choosing an Entry Strategy 267

global strategic Alliances 269 Advantages of Strategic Alliances 269

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x Contents

Disadvantages of Strategic Alliances 270 Making Strategic Alliances Work 271

chapter 9 corporate-Level strategy: horizontal Integration, Vertical Integration, and strategic outsourcing 279 opening case: the proposed Merger of comcast and time Warner cable 279 overview 281 corporate-Level strategy and the Multibusiness Model 281 horizontal Integration: single- Industry corporate strategy 282

Benefits of Horizontal Integration 284

strategy in Action 9.1: Wal-Mart’s expansion into other retail Formats 286

Problems with Horizontal Integration 287 Vertical Integration: entering new Industries to strengthen the “core” Business Model 288

Increasing Profitability Through Vertical Integration 290 Problems with Vertical Integration 293

Alternatives to Vertical Integration: cooperative relationships 294 Short-Term Contracts and Competitive Bidding 295 Strategic Alliances and Long-Term Contracting 295 Building Long-Term Cooperative Relationships 296

strategy in Action 9.2: eBay’s changing commitment to Its sellers 298 strategic outsourcing 299

Benefits of Outsourcing 300 Risks of Outsourcing 302

chapter 10 corporate-Level strategy: related and Unrelated diversification 308 opening case: LVMh: getting Big While staying Beautiful 308 overview 310 Increasing profitability through diversification 310

Transferring Competencies Across Businesses 311 Leveraging Competencies to Create a New Business 312 Sharing Resources and Capabilities 313 Using Product Bundling 314 Utilizing General Organizational Competencies 315

strategy in Action 10.1: United technologies has an “Ace” in Its pocket 317 two types of diversification 319

Related Diversification 319 Unrelated Diversification 320

the Limits and disadvantages of diversification 321 Changes in the Industry or Company 322

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Contents xiContents

Diversification for the Wrong Reasons 322 The Bureaucratic Costs of Diversification 323

strategy in Action 10.2: how Bureaucratic costs rose then Fell at pfizer 326 choosing a strategy 327

Related Versus Unrelated Diversification 327 The Web of Corporate-Level Strategy 327

entering new Industries: Internal new Ventures 329 The Attractions of Internal New Venturing 329 Pitfalls of New Ventures 329 Guidelines for Successful Internal New Venturing 331

entering new Industries: Acquisitions 332 The Attraction of Acquisitions 332 Acquisition Pitfalls 333 Guidelines for Successful Acquisition 336

entering new Industries: Joint Ventures 337 Restructuring 339 Why Restructure? 339

PART FOuR imPLEmENTiNg sTRATEgY

chapter 11 corporate governance, social responsibility, and ethics 348 opening case: starbucks: taking a stand on social Issues 348 overview 350 stakeholders and corporate performance 350

Stakeholder Impact Analysis 352 The Unique Role of Stockholders 352 Profitability, Profit Growth, and Stakeholder Claims 353

strategy in Action 11.1: price Fixing at sotheby’s and christie’s 356 Agency theory 357

Principal–Agent Relationships 357 The Agency Problem 358

strategy in Action 11.2: self-dealing at hollinger International Inc. 361 governance Mechanisms 362

The Board of Directors 362 Stock-Based Compensation 364 Financial Statements and Auditors 365 The Takeover Constraint 366 Governance Mechanisms Inside a Company 367

ethics and strategy 369 Ethical Issues in Strategy 370 The Roots of Unethical Behavior 373 Behaving Ethically 374

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xii Contents

chapter 12 Implementing strategy through organization 384 opening case: organization change at google 384 overview 385 organizational Architecture 386 organizational structure 388

Centralization and Decentralization 388

strategy in Action 12.1: FeMA and hurricane Katrina 391 Tall Versus Flat Hierarchies 391 Structural Forms 394 Formal Integrating Mechanisms 398 Informal Integrating Mechanisms 400

organization controls and Incentives 402 Control Systems 402

strategy in Action 12.2: goal setting and controls at nordstrom 404 Methods of Control 405

organizational culture 409 organization processes 411

strategy in Action 12.3: organizational culture at Lincoln electric 412 Implementing strategy through organizational Architecture 413

Strategy and Organization in the Single-Business Enterprise 413 Strategy and Organization in the Multibusiness Enterprise 416

PART FiVE cAsEs iN sTRATEgic mANAgEmENT c-1

Introduction: Analyzing a case study and Writing a case study Analysis c-4

What is case study Analysis? c-4 Analyzing a case study c-5 Writing a case study Analysis c-10 the role of Financial Analysis in case study Analysis c-11

Profit Ratios C-12 Liquidity Ratios C-13 Activity Ratios C-13 Leverage Ratios C-14 Shareholder-Return Ratios C-15 Cash Flow C-16

conclusion c-16 Endnote C-16

Cases case 1: the U.s. Airline Industry c-17

case 2: Lean production at Virginia Mason c-19

case 3: consolidating dry cleaning c-21

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Contents xiiiContents

case 4: general electric’s ecomagination strategy c-23

case 5: Avon products c-25

case 6: organizational change at Unilever c-27

case 7: the evolution of strategy at procter & gamble c-29

case 8: VF corp. Acquires timberland to realize the Benefits from related diversification c-31

case 9: disaster in Bangladesh c-33

case 10: did goldman sachs commit Fraud? c-37

case 11: Boeing commercial Aircraft c-39

case 12: staples in 2015 c-55

case 13: trader Joe’s: A remarkably Quirky–and successful!–grocery retailer c-70

case 14: getting an Inside Look: given Imaging’s camera pill c-75

case 15: skullcandy c-84

case 16: toyota: Lean production and the rise of the World’s Largest Automobile Manufacturer c-92

case 17: Uber: driving global disruption c-107

case 18: the home Videogame Industry: the First Four decades c-118

case 19: google in 2015 c-136

case 20: Microsoft: From gates to satya nadella c-151

case 21: satellite radio (A): XM versus sirius c-169

case 22: satellite radio (B): the sirius XM Merger and Its Aftermath c-179

case 23: ending hIV? sangamo Biosciences and gene editing c-185

case 24: genzyme’s Focus on orphan drugs c-195

case 25: starbucks, 2015 c-200

case 26: dell Inc.—going private c-210

case 27: 3M—the First 110 years c-220

case 28: the tata group, 2015 c-235

case 29: tesla Motors, 2015 c-243

case 30: the heinz and Kraft Merger c-252

glossary g-1 Index I-1

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xiv

xiv

PreFace

Consistent with our mission to provide students with the most current and up-to-date account of the changes taking place in the world of strategy and management, there have been some significant changes in the 12th edition of Strategic Management: An Integrated Approach.

First, our new co-author, Melissa Schilling has taken on a major role in this edition. Melissa is a Professor of Management and Organization at the Leonard Stern School of Busi- ness at New York University, where she teaches courses on strategic management, corporate strategy, and technology and innovation management. She has published extensively in top-tier academic journals and is recognized as one of the leading experts on innovation and strategy in high-technology industries. We are very pleased to again have Melissa on the book team. Melissa made substantial contributions to the prior edition, and that continues with this edi- tion. She has revised several chapters and written seven high-caliber case studies. We believe her input has significantly strengthened the book.

Second, a number of chapters have been extensively revised. In the 11th edition, Chapter 5, “Business-Level Strategy,” was rewritten from scratch. In addition to the standard material on Porter’s generic strategies, this chapter now includes discussion of value innovation and blue ocean strategy following the work of W. C. Kim and R. Mauborgne. Chapter 6, “Business- Level Strategy and the Industry Environment,” was also extensively rewritten and updated to clarify concepts and bring it into the 21st century. For the 12th edition, we significantly revised and updated Chapter 3, building discussion of resources and competitive advantage around Jay Barney’s popular VRIO model. We also combined Chapters 12 and 13 into a single chap- ter on implementing strategy through organization. We think this more streamlined approach greatly strengthens the book and enhances readability, particularly for students.

Third, the examples and cases contained in each chapter have been revised. Every chapter has a new Opening Case and a new Closing Case. There are also many new Strategy in Action features. In addition, there has been significant change in the examples used in the text to illustrate content. In making these changes, our goal has been to make the book relevant for students reading it in the second decade of the 21st century.

Fourth, we have a substantially revised selection of cases for this edition. All of the cases are either new to this edition or are updates of cases that adopters have indicated they like to see in the book. For this edition, we made the decision to use only our own cases. Over the years, it has been increasingly difficult to find high-quality, third-party cases, while we have received consistently positive feedback about the quality of cases that we have written; so we decided that from this point forward we would only use our own cases. We have also received feedback that many professors like to use shorter cases, instead of or in addition to the longer cases normally included in our book. Consequently, in this edition of the book we have included 30 cases, 20 of which are the traditional long-form cases, and 10 of which are shorter cases. Many of the cases are current as of 2015. We have made an effort to include cases that have high name recognition with students, and that they will enjoy reading and working on. These include cases on Boeing, Staples, Trader Joe’s, Tesla Motors, Uber, Google, Microsoft, and 3M.

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Preface xv

Practicing Strategic Management: An Interactive Approach We have received a lot of positive feedback about the usefulness of the end-of-chapter exercises and assignments in the Practicing Strategic Management sections of our book. They offer a wide range of hands-on and digital learning experiences for students. We are thrilled to announce that we have moved some of these elements into the MindTap digital learning solution to provide a seamless learning experience for students and instructors. We have enhanced these features to give students engaging, multimedia learning experiences that teach them the case analysis framework and provide them multiple opportunities to step into the shoes of a manager and solve real-world strategic challenges. For instructors, MindTap offers a fully customizable, all-in-one learning suite including a digital gradebook, real-time data analytics, and full integration into your LMS. Select from assignments including:

●● Cornerstone to Capstone Diagnostic assesses students’ functional area knowledge and pro- vides feedback and remediation so that students are up to speed and prepared for the stra- tegic management course material.

●● Multimedia Quizzes assess students’ basic comprehension of the reading material to help you gauge their level of engagement and understanding of the content.

●● Directed Cases engage students by presenting businesses facing strategic challenges, placing concepts in real-world context, and making for great points of discussion. As they complete these activities, students receive instruction and feedback that teaches them the case analy- sis methodology and helps them build critical thinking and problem-solving skills.

●● Experiential Exercises are based on the “Practicing Strategic Management” assignments in the end-of-chapter materials in previous editions. They have been updated for the MindTap and challenge students to work in teams using the YouSeeU app in our one-of-a-kind col- laborative environment to solve real-world managerial problems and begin to experience firsthand what it’s like to work in management.

●● Branching Activities present challenging problems that cannot be solved with one specific, correct answer. Students are presented with a series of decisions to be made based upon information they are given about a company and are scored according to the quality of their decisions.

●● Case Analysis Projects are delivered in our online collaborative environment via the You- SeeU app so that students can work together synchronously to complete their compre- hensive case analysis projects, papers, and presentations. Offered in conjunction with robust cases written exclusively by Charles Hill and Melissa Schilling, these activities challenge students to think and act like tomorrow’s strategic leaders. Use our default activity, written by seasoned strategic management instructors, or customize the project to suit your class.

●● Strategy Sign-On projects are back by popular demand. They are designed to provide students the opportunity to explore the latest data through digital research activities. Students first research a company that is facing a strategic management problem, and students then follow the company throughout the semester and complete various case analysis assignments.

It is not our intention to suggest that all of these exercises should be used for every chapter. Strategic management is taught at both undergraduate and graduate levels, and therefore we offer a variety of pedagogically designed activities with numerous challenge levels so that instructors can customize MindTap to best suit their teaching style and the objectives of the course.