Business Strategy & Information Technology Minder Chen, Ph. D. Martin V. Smith School of Business and Economics CSU Channel Islands Minder. Chen@CSUCI. EDU © Minder Chen, 1993 -2013 Strategy & IT - 1
Strategy and IS Industry Structure (5 Competing Forces) Competitive Strategy Value Chain Analysis Business Process Design / Reengineering Information Systems © Minder Chen, 1993 -2013 Strategy & IT - 2
Business Strategies • The job of the strategist is to understand 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. © Minder Chen, 1993 -2013 Strategy & IT - 3
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. © Minder Chen, 1993 -2013 Strategy & IT - 4
The Five Force That Shape Industry Competition Threats of new entrants Entry barriers, Bargaining power, Switching costs Changing environments Entry barriers, Bargaining power, Switching costs Emerging / Disrupted technologies View this video: http: //www. youtube. com/watch? v=m. YF 2_FBCv. Xw © Minder Chen, 1993 -2013 Strategy & IT - 5
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. © Minder Chen, 1993 -2013 Strategy & IT - 6
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 © Minder Chen, 1993 -2013 Strategy & IT - 7
Strategy and the Internet Michael E. Porter, "Strategy and the Internet, " Harvard Business Review, Mar 01, 2001. © Minder Chen, 1993 -2013 Strategy & IT - 8
Threats of Substitute Products or Services • Rivalry is often fierce in commodity industries • Polaroid Substitutive products/services http: //en. wikipedia. org/wiki/Polaroid_Corporation © Minder Chen, 1993 -2013 Strategy & IT - 9
Disruptive Technology © Minder Chen, 1993 -2013 http: //en. wikipedia. org/wiki/File: Disruptivetechnology. gif Strategy & IT - 10
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 © Minder Chen, 1993 -2013 Strategy & IT - 11
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 -87584585 -2. © Minder Chen, 1993 -2013 Strategy & IT - 12
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) © Minder Chen, 1993 -2013 Strategy & IT - 13
Apple’s Entrance to Different Industries • Why Industries have the following Apple products entered and disrupted? (Nov. 2001) (June 2007) i. Tune (Jan. 2001) i. Tunes Store Apple Store (April 2003) (May 2001) © Minder Chen, 1993 -2013 (April 2010) Strategy & IT - 14
Apple Products as Disruptive Forces • Apple Computer Inc. Apple Inc. • Apple II to Mac to i. Mac • i. Pod + i. Tune Store (music download) MP 3, Tower Record • Apple Stores • i. Phone + i. Tune + Apps • i. Pad + i. Tune + Apps + i. Book e. Reader, Notebook computer • i. Radio, i. TV, i. Watch, i. What. So. Ever? ØFrom a system to an eco-system ØFrom hardware to software to contents and services © Minder Chen, 1993 -2013 Strategy & IT - 15
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 © Minder Chen, 1993 -2013 Strategy & IT - 16
Porter Generic Strategies • Cost Leadership: High volume and low profit margin • Differentiation strategy: Unique product features, usually high margin/price and low volume Market Segmentation = Focus strategy Source: http: //blogs. hbr. org/cs/2011/08/why_hps_departure_from_the_pc. html read the comments © Minder Chen, 1993 -2013 Strategy & IT - 17
Value Chain © Minder Chen, 1993 -2013 Strategy & IT - 18
Internet and Value Chain Analysis http: //highered. mcgraw-hill. com/sites/dl/free/0073043559/314063/OBrien_13 e_Chapter_2. pdf © Minder Chen, 1993 -2013 Strategy & IT - 19
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 © Minder Chen, 1993 -2013 Strategy & IT - 20
Apple Inc. © Minder Chen, 1993 -2013 Strategy & IT - 21
Value Chain and ERP, CRM, SCM Enterprise Resource Planning Supply Chain Management © Minder Chen, 1993 -2013 Customer Relationship Management Strategy & IT - 22
Industrial Value Chain © Minder Chen, 1993 -2013 http: //exonous. typepad. com/mis/valuechain. gif Strategy & IT - 23
Process in Perspective: A System View Source: Process in Perspective (or “Tell me again, why are we doing this ‘process’ stuff? ”), Geary Rummler © Minder Chen, 1993 -2013 Strategy & IT - 24
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_13 e_Chapter_2. pdf © Minder Chen, 1993 -2013 Strategy & IT - 25
Order Processing • Online Ordering of a Restaurant Food Delivery http: //msdn. microsoft. com/en-us/library/vstudio/ff 183189. aspx © Minder Chen, 1993 -2013 Strategy & IT - 26
Integration © Minder Chen, 1993 -2013 Strategy & IT - 27
Extra Slides • Backup Slides • Additional resources: – What is strategy? From Slide. Share by by Marc Sniukas © Minder Chen, 1993 -2013 Strategy & IT - 28
© Minder Chen, 1993 -2013 Strategy & IT - 29
Revisit Stan Shih’s “Smile Curve” © Minder Chen, 1993 -2013 Strategy & IT - 30
Process Flow for Sales Orders (SAP) © Minder Chen, 1993 -2013 Strategy & IT - 31
Generic Strategies and Industry Forces © Minder Chen, 1993 -2013 Strategy & IT - 32
Components of a Business Model Source: http: //qcao. ba. ttu. edu/Arc. Fall 10/applegate_ch 01. pdf © Minder Chen, 1993 -2013 Strategy & IT - 33
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/SB 10001424052702304563104576364071955678908. html © Minder Chen, 1993 -2013 Strategy & IT - 34
An Example of Detail Value Chain Activities © Minder Chen, 1993 -2013 Strategy & IT - 35
IT Permeates the Value Chain Source: How information gives you competitive advantage. © Minder Chen, 1993 -2013 Strategy & IT - 36
Industry Value Chain © Minder Chen, 1993 -2013 Strategy & IT - 37
Analyzing Competitive Forces and Strategic Positioning Source: Lynda Applegate, http: //qcao. ba. ttu. edu/Arc. Fall 10/applegate_ch 01. pdf © Minder Chen, 1993 -2013 Strategy & IT - 38
Customer Audit Approch © Minder Chen, 1993 -2013 Strategy & IT - 39
Competitor Audit Approach © Minder Chen, 1993 -2013 Strategy & IT - 40
Product/Market Positioning Audit Approach © Minder Chen, 1993 -2013 Strategy & IT - 41
Value Network Audit Approach © Minder Chen, 1993 -2013 Strategy & IT - 42
Competitive Dynamics (Model of Inter-firm Rivalry): Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Capability Competitor Analysis Market Commonality Resource Similarity Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actor’s Reputation Dependence on the Market Resource Availability Ability for Action and Response Relative Size Speed Innovation Quality Feedback http: //www. wiziq. com/tutorial/381 -Competitive-Dynamics Outcomes Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial Growth-Oriented or Market-Power Actions Ch 5 -43
Five-Force Analysis vs. Competitive Dynamics Level of analysis Intellectual origin Macro industry level Industrial organization economics Focus Competitive advantage Five forces that make up the industry structure Competitive advantage can be created and sustained Orientation Industry/environment Relationship between firms Competitive strategy Dynamic consideration Symmetrical Competitive Dynamics Competition is “dynamic” (or interactive) and relative; actions/ responses matter for firm performance Micro firm and action level Theoretical and empirical work in strategic management extended from Schumpeter and Austrian economics Action/response dyad and/or individual action Competitive advantage is time-dependent and ephemeral; only relative advantages exist Balanced market-resource (or externalinternal) consideration Asymmetrical Generic types Repertoires of actions and responses Comparison between two time points Exchange of actions and responses or interactive behaviors between two firms Basic premise Five-Force Analysis Industry structure determines competition and profitability © Minder Chen, 1993 -2013 http: //www. mingjerchen. com/dl/Academic_Papers/2012_AMA_Competitive_Dynamics. Themes. pdf Strategy & IT - 44
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 © Minder Chen, 1993 -2013 Strategy & IT - 45
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? © Minder Chen, 1993 -2013 Strategy & IT - 46
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 © Minder Chen, 1993 -2013 Strategy & IT - 47
Activity Zara’s Value Chain PRIMARY ACTIVITIES Inbound Logistics IT-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 Logistics Marketing and Sales Service Clothes move on miles of automated conveyor belts at distribution centers and reach stores within 48 hours. 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. No focus on service on products SUPPORT ACTIVITIES Organization IT supports tightly-knit collaboration among designers, store managers, market specialists, production managers and production planners. Human Resources Technology Purchasing Technology is integrated to support all primary activities. Zara’s IT staff works with vendor to develop automated conveyor to support distribution activities. Vertical integration reduces amount of purchasing needed. © Minder Chen, 1993 -2013 Strategy & IT - 48
Competitive Force IT Influence on Competitive Force Threat of New 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 Entrants relationships that have been built over time. Further it has a rich information repository about customers that would be hard to replicate. With its constant infusion of new products, buyers are drawn to Zara stores. Zara boasts Bargaining more than 11, 000 new designs a year, whereas competitors typically offer only 2, 000 – Power of 4, 000. Further, because of the low inventory that the Zara stores stock, the regulars Buyers 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. Its computer-controlled cutting machine cuts up to 1000 layers at a time. It then sends Bargaining the cut materials to suppliers who sew the pieces together. The suppliers’ work is Power of relatively simple and many suppliers can do the sewing. Thus, the pool of suppliers is Suppliers 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. Industry competitors long marketed the desire of durable, classic lines. Zara forces on Threat of meeting customer preferences for trendy, low-cost fashion. It has the highest sales per Substitute square foot of any of its competitors. It does so with virtually no advertising and only Products 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. Zara offers extremely fashionable lines that are only expected to last for approximately Industrial 10 wears. It offers trendy, appealing apparel at a hard-to-beat price. Competitors © Minder Chen, 1993 -2013 Strategy & IT - 49
Five Competing Forces You. Tube Video: The Five Competitive Forces That Shape Strategy © Minder Chen, 1993 -2013 Strategy & IT - 50
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