Strategy - California State University Channel Islands

Strategy - California State University Channel Islands

Business Strategy & IT Minder Chen, Ph.D. [email protected] Minder Chen, 1993-2013 -1- Strategy and IS Industry Structure (5 Competing Forces) Competitive Strategy

Value Chain Analysis Business Process Design / Reengineering Information Systems Minder Chen, 1993-2013 -2- 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 industrys structure and shapes the nature of competitive interaction within an industry. Minder Chen, 1993-2013 -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 and a firm strategic positioning Identify the strongest competitive force or forces for strategy formulation. Minder Chen, 1993-2013 -4- New Entrances or Substitutes Rivalry is often fierce in commodity industries Photographic film industry: Kodak and Fuji

Key competing force Polaroid Substitutive products/services http://en.wikipedia.org/wiki/Polaroid_Corporation New entrants are diversifying from other markets, they can leverage existing capabilities Pepsi did when it entered the bottled water industry, Microsoft did when it began to offer internet browsers (embrace and extend) Apple did when it entered the music distribution business. http://www.businessweek.com/1996/29/960715.htm INSIDE MICROSOFT (Part 1) INSIDE MICROSOFT (Part 2) Minder Chen, 1993-2013

-5- Five Competing Forces YouTube Video: The Five Competitive Forces That Shape Strategy Minder Chen, 1993-2013 -6- 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 organizations reputation as a reliable partner.

Search costs: Finding and evaluating a new alternative costs time and money. Minder Chen, 1993-2013 -7- 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 -8- Entry threat/ Entry barriers Emerging

technologies http://www.youtube.com/watch?v=mYF2_FBCvXw Minder Chen, 1993-2013 -9- Disruptive Technology Minder Chen, 1993-2013 http://en.wikipedia.org/wiki/File:Disruptivetechnology.gif - 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. (E.g., the lower priced Ford Model T) Bower, Joseph L. & Christensen, Clayton M. (1995). "Disruptive Technologies: Catching the Wave" Harvard Business Review, JanuaryFebruary 1995 Minder Chen, 1993-2013

- 11 - Innovators 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. Minder Chen, 1993-2013 - 12 - Strategy and the Internet Minder Chen, 1993-2013 - 13 - Apples Entrance to Different Industries

Minder Chen, 1993-2013 - 14 - Apple Apple Computer Inc. Apple Inc. Apple to Mac iPod + iTune + music

Apple Stores (see teaching note) iPhone + iTune + Apps iPad + iTune + Apps + iBook From a system to an eco-system From hardware to software to contents and services Minder Chen, 1993-2013 - 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. Minder Chen, 1993-2013 Photo by Bobby Bank/Getty Images - 16 - Customer Audit Approch Minder Chen, 1993-2013 - 17 - Competitor Audit Approach

Minder Chen, 1993-2013 - 18 - Analyzing Competitive Forces and Strategic Positioning http://qcao.ba.ttu.edu/ArcFall10/ applegate_ch01.pdf Minder Chen, 1993-2013 - 19 - Porter Generic Strategies Cost Leadership: High volume and low profit margin

Differentiation strategy: High margin/price, low volume Source: http://blogs.hbr.org/cs/2011/08/why_hps_departure_from_the_pc.html read the comments Minder Chen, 1993-2013 - 20 - Generic Strategies and Industry Forces Minder Chen, 1993-2013 - 21 - Value Chain

Minder Chen, 1993-2013 - 22 - Internet and Value Chain Analysis http://highered.mcgraw-hill.com/sites/dl/free/0073043559/314063/OBrien_13e_Chapter_2.pdf Minder Chen, 1993-2013 - 23 - Value Chain and ERP, CRM, SCM Enterprise Resource Planning

Supply Chain Management Minder Chen, 1993-2013 Customer Relationship Management - 24 - Value Network Audit Approach Minder Chen, 1993-2013 - 25 - Competitive Dynamcis (Model of Interfirm 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 Actors 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 Action Ch5- Five-Force Analysis vs. Competitive Dynamics Five-Force Analysis Industry structure determines competition and profitability Competitive Dynamics

Competition is dynamic (or interactive) and relative; actions/ responses matter for firm performance Level of analysis Intellectual origin Macro industry level Industrial organization economics Micro firm and action level Theoretical and empirical work in strategic management extended from Schumpeter and Austrian economics

Focus Competitive advantage Five forces that make up the industry structure Competitive advantage can be created and sustained Action/response dyad and/or individual action Competitive advantage is time-dependent and ephemeral; only relative advantages exist Orientation

Industry/environment Relationship between firms Competitive strategy Dynamic consideration Symmetrical 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 Minder Chen, 1993-2013 http://www.mingjerchen.com/dl/Academic_Papers/2012_AMA_Competitive_DynamicsThemes.pdf - 27 -

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

- 28 - Product/Market Positioning Audit Approach Minder Chen, 1993-2013 - 29 - 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 - 30 - 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 Minder Chen, 1993-2013 - 31 - Stan Shih 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 - 32 - Apple Inc. Minder Chen, 1993-2013 - 33 - Stan Shih Smile Curve Minder Chen, 1993-2013

- 34 - Components of a Business Model http://qcao.ba.ttu.edu/ArcFall10/applegate_ch01.pdf Minder Chen, 1993-2013 - 35 - Process in Perspective Source: Process in Perspective (or Tell me again, why are we doing this process stuff?), Geary Rummler Minder Chen, 1993-2013 - 36 -

Business Processes The order management process consists of several business processes and crosses the boundaries of traditional business functions. http://highered.mcgraw-hill.com/sites/dl/free/0073043559/314063/OBrien_13e_Chapter_2.pdf Minder Chen, 1993-2013 - 37 - An Example of Detail Value Chain Activities Minder Chen, 1993-2013 - 38 -

IT Permeates the Value Chain Source: How information gives you competitive advantage. Minder Chen, 1993-2013 - 39 - Industrial Value Chain Minder Chen, 1993-2013 - 40 - Industry Value Chain

Minder Chen, 1993-2013 - 41 - Activity Zaras Value Chain PRIMARY ACTIVITIES Inbound Logistics Operations 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. Information systems support decisions about the fabric, cut and price points. Cloth is ironed

and products are packed on hangers so they dont 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. Clothes move on miles of automated conveyor belts at distribution centers and reach stores Outbound Logistics within 48 hours. Limited inventory allows low percentage of unsold inventory (10%); POS at stores linked to Marketing and headquarters to track how items are selling; Customers ask for what they want and this Sales information is transmitted daily from stores to designers over handheld computers. No focus on service on products Service 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. Zaras IT staff works with vendor to develop automated conveyor to support distribution activities. Vertical integration reduces amount of purchasing needed. Minder Chen, 1993-2013 - 42 -

Competitive Force IT Influence on Competitive Force Threat of New Entrants Zaras 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. 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 Buyers 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. Minder Chen, 1993-2013 - 43 - Integration Minder Chen, 1993-2013 - 44 -

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