Strategy & IT - 1 © Minder Chen, 1993-2013 Business Strategy & Information Technology Minder Chen,...

Strategy & IT - 1 © Minder Chen, 1993-2013

Business Strategy & Information Technology

Minder Chen, Ph.D.Martin V. Smith School of Business and Economics

CSU Channel Islands

[email protected]


Strategy and IS

Industry Structure (5 Competing Forces)

Competitive Strategy

Value ChainAnalysis

Business Process Design / Reengineering

InformationSystems


Business Strategies

• The job of the strategist is to understand and cope with competition.

• Competition for profits goes beyond established industry rivals to include four other competitive forces: customers, suppliers, potential entrants, and substitute products.

• The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry.


Industry Structure and Forces

• Forces are intense: airlines, textiles, and hotels, almost no company earns attractive returns on investment.

• Forces are benign: software, soft drinks, and toiletries, many companies are profitable

• Industry structure, manifested in the competitive forces, sets industry profitability & competitiveness in the medium and long run.

• Industry structure affects a firm strategic positioning

• Identify the strongest competitive force or forces for strategy formulation.


The Five Force That Shape Industry Competition

Emerging / Disrupted technologies

Entry barriers,Bargaining power, Switching costs

View this video: http://www.youtube.com/watch?v=mYF2_FBCvXw

Entry barriers, Bargaining power, Switching costs

Threats of new entrants

Changing Changing environmentsenvironments


Sources of Switching Costs• Loyalty programs: Switching can cause customers to lose out on

program benefits. Think frequent purchaser programs that offer “miles” or “points” (all enabled and driven by software).

• Learning costs: Switching technologies may require an investment in learning a new interface and commands.

• Information and data: Users may have to reenter data, convert files or databases, or may even lose earlier contributions on incompatible systems.

• Financial commitment: Can include investments in new equipment, the cost to acquire any new software, consulting, or expertise, and the devaluation of any investment in prior technologies no longer used.

• Contractual commitments: Breaking contracts can lead to compensatory damages and harm an organization’s reputation as a reliable partner.

• Search costs: Finding and evaluating a new alternative costs time and money.


Barriers to Entry

• Supply-side economies of scale

• Demand-side benefits of scale (network effects)

• Customer switching costs: – Enterprise resource planning (ERP) software is an

example of a product with very high switching costs.

• Capital requirements– Semiconductor foundry vs. corner coffee shop

• Incumbency advantages independent of size– Brand, experiences curve

• Unequal access to distribution channels– Using e-commerce for direct sales

• Restrictive government policy


Strategy and the Internet

Michael E. Porter, "Strategy and the Internet," Harvard Business Review, Mar 01, 2001.


Threats of Substitute Products or Services

• Rivalry is often fierce in commodity industries• Polaroid Substitutive products/services

http://en.wikipedia.org/wiki/Polaroid_Corporation


Disruptive Technology

http://en.wikipedia.org/wiki/File:Disruptivetechnology.gif


Type of Innovations

• Sustaining: An innovation that does not affect existing markets.

– Evolutionary: An innovation that improves a product in an existing market in ways that customers are expecting. (E.g., fuel injection)

– Revolutionary (discontinuous, radical): An innovation that is unexpected, but nevertheless does not affect existing markets. (E.g., the automobile)

• Disruptive: An innovation that creates a new market by applying a different set of values, which ultimately (and unexpectedly) overtakes an existing market.

– For example, the lower priced Ford Model T

Bower, Joseph L. & Christensen, Clayton M. (1995). "Disruptive Technologies: Catching the Wave" Harvard Business Review, January–February 1995


Innovator’s Dilemma

• Good firms are usually aware of the innovations, but their business environment does not allow them to pursue them when they first arise, because they are not profitable enough at first and because their development can take scarce resources away from that of sustaining innovations (which are needed to compete against current competition).

• "Generally, disruptive innovations were technologically straightforward, consisting of off-the-shelf components put together in a product architecture that was often simpler than prior approaches. They offered less of what customers in established markets wanted and so could rarely be initially employed there. They offered a different package of attributes valued only in emerging markets remote from, and unimportant to, the mainstream."

http://en.wikipedia.org/wiki/Disruptive_innovation and Christensen, Clayton M. (1997), The innovator's dilemma: when new technologies cause great firms to fail, Boston, Massachusetts, USA: Harvard Business School Press, ISBN 978-0-87584-585-2.


Threats of New Entrants• New entrants are diversifying from other markets,

they can leverage existing capabilities– Pepsi did when it entered the bottled water industry

(i.e., Aquafina)

– Microsoft did when it began to offer internet browsers (embrace and extend)

Source: http://www.businessweek.com/1996/29/960715.htm INSIDE MICROSOFT (Part 1) INSIDE MICROSOFT (Part 2)


Apple’s Entrance to Different Industries• Why Industries have the following Apple products

entered and disrupted?

iTune (Jan. 2001)

iTunes Store (April 2003)

(Nov. 2001) (June 2007) (April 2010)

Apple Store(May 2001)


Apple Products as Disruptive Forces • Apple Computer Inc. Apple Inc.

• Apple II to Mac to iMac

• iPod + iTune + iTune Store (music download) MP3, Tower Record

• Apple Stores

• iPhone + iTune + Apps

• iPad + iTune + Apps + iBook eReader, Notebook computer

• iRadio, iTV, iWatch, iWhatSoEver?From a system to an eco-systemFrom hardware to software to contents and

services


Apple Stores Services

• Intensive control of how employees interact with customers, scripted training for on-site tech support and consideration of every store detail down to the pre-loaded photos and music on demo devices.

• Stores are designed around usages.

http://www.nytimes.com/2012/06/24/business/apple-store-workers-loyal-but-short-on-pay.html?pagewanted=2&_r=0


Porter Generic Strategies• Cost Leadership: High volume and low profit margin

• Differentiation strategy: Unique product features, usually high margin/price and low volume

Source: http://blogs.hbr.org/cs/2011/08/why_hps_departure_from_the_pc.html read the comments

Market Segmentation = Focus strategy


Value Chain


Internet and Value Chain Analysis

http://highered.mcgraw-hill.com/sites/dl/free/0073043559/314063/OBrien_13e_Chapter_2.pdf


Stan Shih’s “Smile Curve”

IBM Leads the Way in the Post-PC Era Why IBM exited the PC market? Source: http://asmarterplanet.com/blog/2011/08/ibm-leads-the-way-in-the-post-pc-era.html


Apple Inc.


Value Chain and ERP, CRM, SCM

Supply Chain Management

Customer Relationship Management

Enterprise Resource Planning


Industrial Value Chain

http://exonous.typepad.com/mis/valuechain.gif


Process in Perspective: A System View

Source: Process in Perspective (or “Tell me again, why are we doing this ‘process’ stuff?”), Geary Rummler


Business Processes

• The order management process consists of several business activities and crosses the boundaries of traditional business functions.

http://highered.mcgraw-hill.com/sites/dl/free/0073043559/314063/OBrien_13e_Chapter_2.pdf


Order Processing

• Online Ordering of a Restaurant Food Delivery

http://msdn.microsoft.com/en-us/library/vstudio/ff183189.aspx


Integration


Extra Slides

• Backup Slides

• Additional resources:– What is strategy? From SlideShare by by Marc by Marc

SniukasSniukas


Revisit Stan Shih’s “Smile Curve”


Process Flow for Sales Orders (SAP)


Generic Strategies and Industry Forces


Components of a Business Model

Source: http://qcao.ba.ttu.edu/ArcFall10/applegate_ch01.pdf


Service at Apple Stores

• "Approach customers with a personalized warm welcome,"

• "Probe politely to understand all the customer's needs,"

• "Present a solution for the customer to take home today,"

• "Listen for and resolve any issues or concerns," and

• "End with a fond farewell and an invitation to return."

http://online.wsj.com/article/SB10001424052702304563104576364071955678908.html


An Example of Detail Value Chain Activities


IT Permeates the Value Chain

Source: How information gives you competitive advantage.


Industry Value Chain


Analyzing Competitive Forces and Strategic Positioning

Source: Lynda Applegate, http://qcao.ba.ttu.edu/ArcFall10/applegate_ch01.pdf


Customer Audit Approch


Competitor Audit Approach


Product/Market Positioning Audit Approach


Value Network Audit Approach

Ch5-43

Relative SizeSpeed

InnovationQuality

Ability for Ability for Action and Action and ResponseResponse

OutcomesOutcomesDrivers of Drivers of

Competitive Competitive BehaviorBehavior

AwarenessMotivationCapability

Competitor Competitor AnalysisAnalysisMarket

Commonality

ResourceSimilarity

Interfirm Rivalry:Interfirm Rivalry:Attack & ResponseAttack & Response

Likelihood of AttackLikelihood of AttackFirst Mover Incentives

Likelihood of ResponseLikelihood of ResponseType of Competitive

Action

Dependence on theMarket

Resource Availability

Actor’s Reputation

CompetitiveCompetitive

Slow, Standardor Fast Cycle

Market TypesMarket Types

CompetitiveCompetitive

SustainedOutcomesOutcomes

CompetitiveAdvantageTemporaryAdvantageEvolutionaryEvolutionaryOutcomesOutcomes

Entrepreneurial

or Market-PowerGrowth-Oriented

Actions

Feedback

Competitive Dynamics (Model of Inter-firm Rivalry):Likelihood of Attack and Response

http://www.wiziq.com/tutorial/381-Competitive-Dynamics


Five-Force Analysis vs. Competitive Dynamics

Five-Force Analysis Competitive Dynamics

Basic premise Industry structure determines competition and profitability

Competition is “dynamic” (or interactive) and relative; actions/ responses matter for firm performance

Level of analysis Macro industry level Micro firm and action levelIntellectual origin Industrial organization

economicsTheoretical and empirical work in strategic management extended from Schumpeter and Austrian economics

Focus Five forces that make up the industry structure

Action/response dyad and/or individual action

Competitive advantage

Competitive advantage can be created and sustained

Competitive advantage istime-dependent and ephemeral;only relative advantages exist

Orientation Industry/environment Balanced market-resource (or external-internal) consideration

Relationship between firms

Symmetrical Asymmetrical

Competitive strategy

Generic types Repertoires of actions and responses

Dynamic consideration

Comparison between two time points

Exchange of actions and responses or interactive behaviors between two firms

http://www.mingjerchen.com/dl/Academic_Papers/2012_AMA_Competitive_DynamicsThemes.pdf


Resource-Based View of Competitive Advantage

• The strategic thinking approach suggesting that if a firm is to maintain sustainable competitive advantage, it must control an exploitable resource, or set of resources, that have four critical characteristics.

• These resources must be

– Valuable,

– Rare,

– Imperfectly imitable, and

– Non-substitutable.

• http://en.wikipedia.org/wiki/Resource-based_view • Nicholas Carr, "Does IT Matter," Harvard Business Review, May 2003, pp. 41-48. (CSUCI Library Online Database) and Responses


4-Step Process

• What are your mission/visions/goals?

• What are your strategies?– Product/service strategies

– Marketing/branding strategies

– Technology strategies

• What are your methods for implementing your strategies?

• How do you know you are making progress towards your goals?


Five Questions

• Strategy is choice.

• 5 choices: a winning aspiration, where to play, how to win, core capabilities, and management systems.

• More specifically, strategy is an integrated set of choices that uniquely positions the firm in its industry so as to create sustainable advantage and superior value relative to the competition.

Source: A Play Book for Strategy


Activity Zara’s Value Chain

PRIMARY ACTIVITIES

Inbound LogisticsIT-enabled Just-in-Time (JIT) strategy results in inventory being received when needed. Most dyes are purchased from its own subsidiaries to better support JIT strategy and reduce costs.

Operations

Information systems support decisions about the fabric, cut and price points. Cloth is ironed and products are packed on hangers so they don’t need ironing when they arrive at stores. Price tags are already on the products. Zara produces 60% of its merchandise in-house. Fabric is cut and dyed by robots in 23 highly automated Spanish factories.

Outbound LogisticsClothes move on miles of automated conveyor belts at distribution centers and reach stores within 48 hours.

Marketing and Sales

Limited inventory allows low percentage of unsold inventory (10%); POS at stores linked to headquarters to track how items are selling; Customers ask for what they want and this information is transmitted daily from stores to designers over handheld computers.

ServiceNo focus on service on products

SUPPORT ACTIVITIES

OrganizationIT supports tightly-knit collaboration among designers, store managers, market specialists, production managers and production planners.

Human Resources

TechnologyTechnology is integrated to support all primary activities. Zara’s IT staff works with vendor to develop automated conveyor to support distribution activities.

PurchasingVertical integration reduces amount of purchasing needed.


Competitive Force

IT Influence on Competitive Force

Threat of New Entrants

Zara’s IT supports its tightly-knit group of designers, market specialists, production managers and production planners. New entrants are unlikely to provide IT to support relationships that have been built over time. Further it has a rich information repository about customers that would be hard to replicate.

Bargaining Power of Buyers

With its constant infusion of new products, buyers are drawn to Zara stores. Zara boasts more than 11,000 new designs a year, whereas competitors typically offer only 2,000 – 4,000. Further, because of the low inventory that the Zara stores stock, the regulars buy products they like when they see them because they are likely to be gone the next time they visit the store. More recently Zara has employed laser technology to measure 10,000 women volunteers so that it can add the measurements of ‘real’ customers into its information repositories. This means that the new products will be more likely to fit Zara customers.

Bargaining Power of Suppliers

Its computer-controlled cutting machine cuts up to 1000 layers at a time. It then sends the cut materials to suppliers who sew the pieces together. The suppliers’ work is relatively simple and many suppliers can do the sewing. Thus, the pool of suppliers is expanded and Zara has greater flexibility in choosing the sewing companies. Further, because Zara dyes 50% of the fabric in its plant, it is less dependent on suppliers and can respond more quickly to mid-season changes in customer color preferences.

Threat of Substitute Products

Industry competitors long marketed the desire of durable, classic lines. Zara forces on meeting customer preferences for trendy, low-cost fashion. It has the highest sales per square foot of any of its competitors. It does so with virtually no advertising and only 10% of stock is unsold. It keeps its inventory levels very low and offers new products at an amazing pace for the industry (i.e., 15 days from idea to shelves). Zara has extremely efficient manufacturing and distribution operations.

Industrial Competitors

Zara offers extremely fashionable lines that are only expected to last for approximately 10 wears. It offers trendy, appealing apparel at a hard-to-beat price.


Five Competing Forces

YouTube Video: The Five Competitive Forces That Shape Strategy

Strategy & IT - 1 © Minder Chen, 1993-2013 Business Strategy & Information Technology Minder Chen,...

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