Chapter 2Chapter 2Chapter 2Chapter 2

Strategic AdvantageStrategic Advantage5 Competitive Forces5 Competitive ForcesStrategic AdvantageStrategic Advantage5 Competitive Forces5 Competitive Forces

Why Study Strategic IT?Why Study Strategic IT?Why Study Strategic IT?Why Study Strategic IT?

• Technology is no longer an Technology is no longer an afterthought in forming business afterthought in forming business strategy, but the actual cause strategy, but the actual cause and driver.and driver.

• IT can change the way IT can change the way businesses compete.businesses compete.

Strategic View of ISStrategic View of ISStrategic View of ISStrategic View of IS

• Information systems are Information systems are vital vital competitive networkscompetitive networks..

• Information systems are a means of Information systems are a means of organizational renewalorganizational renewal..

• An IS can enable a businesses to An IS can enable a businesses to reengineer or reinventreengineer or reinvent itself in itself in order to survive and succeed.order to survive and succeed.

Porter’s Competitive ForcesPorter’s Competitive ForcesPorter’s Competitive ForcesPorter’s Competitive Forces

To survive and succeed, a business must To survive and succeed, a business must develop and implement strategies to develop and implement strategies to effectively counter the:effectively counter the:

1.1. RivalryRivalry of competitors within its industry of competitors within its industry2.2. Threat of Threat of new entrantsnew entrants into an industry into an industry

and its marketsand its markets3.3. Threat posed by Threat posed by substitute productssubstitute products

which might capture market sharewhich might capture market share4.4. Bargaining power of Bargaining power of customerscustomers5.5. Bargaining power of Bargaining power of supplierssuppliers

Rivalry of competitorsRivalry of competitorsRivalry of competitorsRivalry of competitors

• Online-shopping, price Online-shopping, price comparison tools (Froogle, comparison tools (Froogle, Shopzilla, etc.) increase rivalry.Shopzilla, etc.) increase rivalry.

• Industries with high rivalryIndustries with high rivalry– AutomotiveAutomotive– Cell PhoneCell Phone– Retail ClothingRetail Clothing– Fast FoodFast Food

• Industries with low rivalry?Industries with low rivalry?

Threat of new entrantsThreat of new entrantsThreat of new entrantsThreat of new entrants

• Internet/E-commerce enables a Internet/E-commerce enables a business to emerge overnightbusiness to emerge overnight

• Almost any medium-sized retail Almost any medium-sized retail store can become a global e-store can become a global e-commerce competitor at little commerce competitor at little cost.cost.

It costs a lot to become a global donut competitor

Substitute ProductsSubstitute ProductsSubstitute ProductsSubstitute Products

• Internet makes substitutes easier Internet makes substitutes easier to find.to find.– Can’t afford to fly...take a train.Can’t afford to fly...take a train.– Ipod not available...buy a Dell DJIpod not available...buy a Dell DJ– Thomas the Tank Engine costs too Thomas the Tank Engine costs too

much...consider Imaginarium.much...consider Imaginarium.

Bargaining powerBargaining powerBargaining powerBargaining power

Customer:Customer:

• Here is where Here is where the Internet has the Internet has empowered the empowered the customercustomer

– EbayEbay– Lending Tree Lending Tree – Reverse Reverse

auctionsauctions

• Suppliers:Suppliers:

• Home Depot, Home Depot, Walmart, etc. can Walmart, etc. can persuade suppliers persuade suppliers to lock-out the little to lock-out the little guysguys– By forcing suppliers By forcing suppliers

into investing in SCM into investing in SCM softwaresoftware

Competitive StrategiesCompetitive StrategiesCompetitive StrategiesCompetitive Strategies

1.1. Cost LeadershipCost Leadership

2.2. DifferentiationDifferentiation

3.3. InnovationInnovation

4.4. GrowthGrowth

5.5. AllianceAlliance

Cost Leadership StrategyCost Leadership StrategyCost Leadership StrategyCost Leadership Strategy

• Becoming a low-cost producer of Becoming a low-cost producer of products and servicesproducts and services

• Finding ways to help suppliers Finding ways to help suppliers and customers reduce their costsand customers reduce their costs

• Increase costs of competitorsIncrease costs of competitors

Differentiation StrategyDifferentiation StrategyDifferentiation StrategyDifferentiation Strategy

• Developing ways to differentiate Developing ways to differentiate a firm’s products and services a firm’s products and services from its competitors’from its competitors’

Innovation StrategyInnovation StrategyInnovation StrategyInnovation Strategy

• Development of Development of unique products unique products and servicesand services

• Entry into unique Entry into unique markets or market markets or market nichesniches

• Making radical Making radical changes that alter changes that alter the fundamental the fundamental structure of an structure of an industryindustry

Growth StrategyGrowth StrategyGrowth StrategyGrowth Strategy

• Significantly Significantly expanding capacityexpanding capacity to to produce goods and servicesproduce goods and services– Expanding into Expanding into global marketsglobal markets

• DiversifyingDiversifying into new products and into new products and servicesservices

• IntegratingIntegrating into related products and into related products and servicesservices

Example of Bad Diversification:Example of Bad Diversification:

Dr. B.’s great new business idea:Dr. B.’s great new business idea:The Quick-Lube, Dentist, Movie TheaterThe Quick-Lube, Dentist, Movie Theater

Alliance StrategyAlliance StrategyAlliance StrategyAlliance Strategy

• Establishing new business linkages Establishing new business linkages and alliances with and alliances with – customers, customers, – suppliers, suppliers, – competitors, competitors, – consultants, etc.consultants, etc.

• Great advantages from linking Great advantages from linking Information Systems of different Information Systems of different companies.companies.

ExamplesExamplesExamplesExamples

Cost Leadership:Cost Leadership:

• Priceline.comPriceline.com

• BiddingBidding

• Buyer set pricingBuyer set pricing

ExamplesExamplesExamplesExamples

Innovation:Innovation:

E-tradeE-trade

Online discount Online discount stock tradingstock trading

Market leader, Market leader, then problems...then problems...

ExamplesExamplesExamplesExamples

Growth:Growth:

WalmartWalmart

Beer, diapers, discount beef Beer, diapers, discount beef jerky, country music CD’s, jerky, country music CD’s, NASCAR merchandise, NASCAR merchandise, cheap plastic furniture, and cheap plastic furniture, and every ingredient you need every ingredient you need to make napalm (all at low to make napalm (all at low prices).prices).

Market leadershipMarket leadership

ExamplesExamplesExamplesExamples

Differentiation:Differentiation:

• MoenMoen

• Online customer Online customer designdesign

• Increase in Increase in market sharemarket share

ExamplesExamplesExamplesExamples

Alliance:Alliance:

Walmart & Proctor N’ GambleWalmart & Proctor N’ Gamble

Beer, diapers, discount beef jerky, Beer, diapers, discount beef jerky, country music CD’s, NASCAR country music CD’s, NASCAR merchandise, cheap plastic merchandise, cheap plastic furniture, every ingredient you furniture, every ingredient you need to make napalm, and need to make napalm, and oxycontinoxycontin (all at low prices). (all at low prices).

Even more Market leadershipEven more Market leadership

Other Competitive StrategiesOther Competitive StrategiesOther Competitive StrategiesOther Competitive Strategies

• Locking in customersLocking in customers or suppliers or suppliers by building valuable new relationships by building valuable new relationships with them.with them.

• Building switching costsBuilding switching costs so a firm’s so a firm’s customers or suppliers are reluctant customers or suppliers are reluctant to pay the costs in time, money, to pay the costs in time, money, effort, and inconvenience that it effort, and inconvenience that it would take to switch to a company’s would take to switch to a company’s competitors.competitors.

Other Competitive StrategiesOther Competitive StrategiesOther Competitive StrategiesOther Competitive Strategies

• Raising barriers to entryRaising barriers to entry that that would discourage or delay other would discourage or delay other companies from entering a market.companies from entering a market.

• Leveraging investmentLeveraging investment in in information technology by developing information technology by developing new products and services that would new products and services that would not be possible without a strong IT not be possible without a strong IT capability.capability.

Advantage vs. NecessityAdvantage vs. NecessityAdvantage vs. NecessityAdvantage vs. Necessity

• Competitive AdvantageCompetitive Advantage – – developing products, services, developing products, services, processes, or capabilities that give a processes, or capabilities that give a company a superior business position company a superior business position relative to its competitors and other relative to its competitors and other competitive forcescompetitive forces

• Competitive NecessityCompetitive Necessity – products, – products, services, processes, or capabilities services, processes, or capabilities that are necessary simply to compete that are necessary simply to compete and do business in an industryand do business in an industry

Customer-Focused BusinessCustomer-Focused BusinessCustomer-Focused BusinessCustomer-Focused Business

A business that:A business that:

• can anticipate customers’ future can anticipate customers’ future needs.needs.

• responds to customer concerns.responds to customer concerns.

• provides top-quality customer provides top-quality customer service.service.

Value ChainValue ChainValue ChainValue Chain

Definition:Definition:• View of a firm as a series, chain, View of a firm as a series, chain,

or network of basic activities that or network of basic activities that add value to its products and add value to its products and services, services,

• and thus add a margin of value and thus add a margin of value both to the firm and its both to the firm and its customers.customers.