3Can Information Technology: Build barriers to prevent a company from entering an industry.Build in cost; difficult for a customer to switch suppliers.Change the basis for competition within the industry.Change the balance of power in the relationship that a company has with customers or suppliers.Provide the basis for new product and services, new markets or other new business opportunities.
4Porter Competitive Model PotentialNew EntrantsBargainingPowerof SuppliersIntra-IndustryRivalryStrategic Business UnitBargainingPowerof BuyersSubstituteProductsand ServicesSource: Michael E. Porter“Forces Governing Competition in IndustryHarvard Business Review, Mar.-Apr. 1979
5Generic Value Chain PRIMARY ACTIVITIES FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENTSUPPORT ACTIVITIESTECHNOLOGY DEVELOPMENTPROCUREMENTINBOUNDLOGISTICSOUTBOUNDLOGISTICSMARKETINGAND SALESOPERATIONSSERVICEPRIMARY ACTIVITIESAdapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. fromCOMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright1985 by Michael E. Porter.
6Key Objective Gain a competitive advantage! Understand the forces that influence this.Know how to use models to do an objective evaluation.
7The Porter Competitive Model for Industry Structure Analysis Chapter 3The Porter Competitive ModelforIndustry Structure Analysis
8A Successful IS Professional Understands both IT and the business in which they work.Has good communication skills.Can sell their IT solution to someone else’s problem.Is a self starter and can handle a large amount of personal responsibility.Manages their own career.Has a high degree of personal confidence.
9ATP Approach 1. Read Value Line articles for industry perspective and company information.2. Log onto the company web page and look at generalbusiness information and most recent annual report.A. Determine dominant business.B. Identify business and IT leaders.C. Define the industry the company is in.D. Identify the major markets in which theyoperate and determine the market that you willanalyze using the Porter Competition model.E. Start to develop an understanding of the sixprimary business strategies in this industry.
10ATP Research 1. Value Line 2. Company web page and annual report. 3. Internet search engines:YahooAsk JeevesGoogle4. Library reference documents5. Jack Callon and his documents
11How and Where to Search Company Name and Executive Names Competitor Name/Web PagesIT Publications - Datamation, InformationWeekBusiness Publications - ABI, Fortune, BusinessWeekIndustry Associations - e.g. Semiconductor Industry AssociationFinancial Analysis Web pagesLibrary Reference Desk - Barons, Moodys, etc.Jack Callon’s office
12Awareness of competitive forces can help a company stake out a positionin its industry that is less vulnerableto attack.Michael E. PorterCompetitive Strategy
13The Plan Address the Concepts of the Porter Competitive Model. Provide some industry examples using theCompetitive Model.Address the Value Chain conceptually and with industry examples.Revisit each of these using the Airline Industry as the example in Chapter 4.
14Porter Competitive Model Was not developed for IS use.Breaks an industry into logical parts,analyzes them and puts them back together.Avoids viewing the industry too narrowly.Provides an understanding of the structureof an industry’s business environment.Provides an understanding of competitivethreats into an industry.
15Two Key Questions 1. How structurally attractive is the industry? 2. What is the company’s relativeposition within the industry?
16Why Do You Care?The collective strength of the industry forces determines the ultimate profit potential of an industry.The strongest competitive forces are of greatest importance in formulating competitive strategies.Every industry has an underlying structure, or a set of fundamental economic and technical characteristics that gives rise to these competitive forces.
17Why Do You Care?This view of competition pertains to industries selling products and those dealing in services.A few characteristics are often key to the strength of each competitive force.
18Key Industry Analysis Factors Collecting the data.Determining which data is crucial.Selecting an appropriate overall approach.Deciding on the logical starting point.
19Basic Objectives of the SBU 1. To create effective links withbuyers and suppliers.2. To build barriers to new entrantsand substitute products.
20Strategic Business Unit Porter Competitive ModelPotentialNew EntrantsBargainingPowerof SuppliersIntra-IndustryRivalryStrategic Business UnitBargainingPowerof BuyersSubstituteProductsand ServicesSource: Michael E. Porter“Forces Governing Competition in IndustryHarvard Business Review, Mar.-Apr. 1979Figure 3-1
21Rivalry Likelihood Industry growth rate and potential. Profit margins.Industry growth rate and potential.A lack of capacity to satisfy the market.Fixed costs.Competitor concentration and balance.Diversity of competitors.Existing brand identity.Switching costs.Exit barriers.
22A Buyer Has Power If:1. It has large, concentrated buying power that enablesit to gain volume discounts and/or specialterms or services.2. What it is buying is standard or undifferentiated andthere are multiple alternative sources.3. It earns low profit margins so it has great incentiveto lower its purchasing costs.4. It has a strong potential to backward integrate.5. The product is unimportant to the quality of thebuyers’ products or services.
23A Supplier Has Power If: 1. There is domination of supply by a few companies.2. Its product is unique or at least differentiated.3. It has built up switching costs.4. It provides benefits through geographic proximity toits customers.5. It poses a definite threat to forward integrate intoits customers’ business.6. A long time working relationship provides uniquecapabilities.
24DefinitionsNew Entrant: An existing company or a startup that has not previously competed with the SBU in its geographic market. It can also be an existing company that through a shift in business strategy begins to compete with the SBU.Substitute Product or Service: An alternative to doing business with the SBU. This depends on the willingness of the buyers to substitute, the relative price/performance of the substitute and/or the level of the switching cost.
25Possible Barriers to Entry Economies of scale.Strong, established cost advantages.Strong, established brands.Proprietary product differences.Major switching costs.Limited or restrained access to distribution.Large capital expenditure requirements.Government policy.Definite strong competitor retaliation.
26Substitute Threats Buyer propensity to substitute. Relative price/performance of substitutes.Switching costs.
27Competitive StrategyWhat is driving competition in my current or future industry?What are my current or future competitors likely to do and how will we respond?How can we best posture ourselves to achieve and sustain a competitive advantage?
28Strategy Options According to Michael Porter Primary Strategies1. Differentiation2. Least CostSupporting Strategies1. Innovation2. Growth3. Alliance
29Can Information Systems: 1. Build barriers to prevent a company from entering an industry?2. Build in costs that would make it difficult for a customer to switch to another supplier?3. Change the basis for competition within the industry?4. Change the balance of power in the relationship that a company has with customers or suppliers?5. Provide the basis for new products and services, new markets or other new business opportunities?
30Porter Competitive Model Heavyweight Motorcycle Manufacturing Industry North American MarketParts ManufacturersElectronic ComponentsSpecialty Metal SuppliersMachine Tool VendorsLabor UnionsIT VendorsForeign ManufacturerEstablished CompanyEntering a New MarketSegmentNew StartupPotential New EntrantIntra-Industry RivalrySBU: Harley-DavidsonRivals: Honda, BMW, Suzuki, YamahaBargaining Power of SuppliersBargaining Power of BuyersRecreational CyclistYoung AdultsLaw EnforcementMilitary UseRacersAutomobilesPublic TransportationMopedsBicyclesSubstitute Product or Service
31Business Strategy Model - Motorcycle Manufacturing Industry Product StrategyType/Purpose/SizeHeavyweight Off-Road Dual Purpose Road Racing Café RacerPrice StrategyEntry Level Moderate PremiumMarket StrategyLaw Enforcement Military Recreational Professional Young AdultNorth American Europe Japan/Asia Latin AmericaManufacturing StrategyVertically Integrated Vendor Emphasis OutsourceSales/Distribution StrategyDistributors Independent Dealers Franchised DealersCompany StructureIndependent Alliances Joint Ventures/SubsidiariesInformation SystemsEngineering Product Design Manufacturing Sales/Distribution Business
32Porter Competitive Model Analysis for the San Francisco Giants New EntrantsSuppliersIntra-IndustryRivalrySBU: SF GiantsBuyersSubstitute Products and Services
33Porter Competitive Model Analysis for the San Francisco Giants Bay Area MarketNew EntrantsArena Football LeagueCanadian FootballProfessional HockeyProfessional SoccerSumo TournamentsSuppliersPlayers UnionCity of SFTransportation ServicesFood ServiceSovereignsPolice and SanitationServiceUtilitiesStadium EmployeesBuyersDie Hard Giants FansDie Hard Baseball FansFair Weather Baseball FansNon-baseball FansOut of Town VisitorsOpposing Team FansAge Group SegmentsGroups Versus IndividualsCorporate SponsorsSports Writers and MediaOutletsIntra-Industry RivalrySBU: SF GiantsRivals: Oakland A’sMinor League BaseballS.F. 49ersGolden State WarriorsCollege Athletic EventsHigh School Athletic EventsMovies, Stage Plays, etc.General Travel and Travel PackagesSubstitute Products and ServicesTelevised Baseball Games - Free or Cable Service at HomeTelevised Games at Sports BarsRadio Broadcasts of Baseball GamesRotisserie Leagues, Trading Cards, Memorabilia
34Porter Competitive Model Venture Capital Industry in the U.S. More firmsMore capitalDiminishing opportunitiesCut-throat competitionHigher deal pricesPotentialNew EntrantsLow Barriers to EntryRapid EntryAttractive Rates of ReturnMore global sourcesIntra-Industry RivalrySBU: Kleiner Perkins Caufield & ByersRivals: Hambrecht & QuistSequoia CapitalSierra VenturesArthur Rock & Co.Asset Management Corp.BargainingPowerof BuyersBargainingPowerof SuppliersConcentration in thehands of a few institutionsIncreasing sophisticationBetter informationIncreasing sophisticationMore optionsBetter informationBreakdown ofindustry boundariesSubstituteProductsand Services
35VC Sponsored Companies Digital EquipmentApple ComputerFederal ExpressSun MicrosystemsCompaqLotus DevelopmentStaples
36Major Start-up Company Sources Stanford UniversityMITUniversity of Texas
37Venture Capital Industry The roots of the industry can be traced to the 1920s and 1930s within the U.S.Early companies that obtained VC funding were Eastern Airlines and Xerox.First VC firm was ARD in 1946 founded by Ralph Flanders, President of Federal Reserve Bank of Boston.Big push to take advantage of WWII technology developed at MIT.The industry all but shut down between 1970 and 1977.Economic growth implications of emerging, small companies.
38VC Strategies inInvest in management team and market potential.Stress value-added company building.Concentrate on start-up and early stage companies.Be a lead investor.Invest for ten years, maybe longer but harvest whenappropriate.Raise a new fund once your present fund is performing well.Deal making and transaction skills are important but not central to the value creation process.
391980 and Beyond StrategiesRaise new funds while the money is flowing instead of when you need the money.Rely on financial engineering for quick entry and exits.Exploit hot IPO markets to harvest early and often.Co-invest versus being the lead investor.Look to later-stage LBO and MBO deals for large minimums and faster returns.Worry less about the management team (You can shape it later).Worry more about the fiduciary expectations of the limited partners.Trade the horse before it dies.
40Porter Competitive Model Education Industry: U.S. Universities PotentialNew EntrantsForeign UniversitiesDistance LearningMotorola U.National Technical UniversityBargainingPowerof SuppliersBargainingPower of BuyersIntra-Industry RivalryStrategic Business UnitFacultyStaffEquipment andService SuppliersAlumniFoundationsBusinessGovernmentStudentsParentsBusinessEmployersLegislatorsSubstituteProductsand ServicesBooks and VideotapesComputer-Based TrainingTraining CompaniesConsulting Firms
41U.S. University Industry Structure Intra-Industry Rivalry:Low growth rate or shrinkageExcess capacityUndifferentiated productCompetition for fundingand contributionsBargaining Power of Buyers:Price PressuresMobilityBargaining Power of Suppliers:Cost PressuresBid Processes Are CommonUnions and TenureBarriers to Entry:Low entry barriersHigh exit barriersSubstitutes:Easy to substituteSelf-study success
42Porter Competitive Model Tips 1. To incorrectly define the industry can cause majorproblems in doing Section I of the analysis term paper.2. You must identify the specific market being evaluated.3. Your analysis company is the Strategic Business Unit.4. Identify rivals by name for majors, by category for minorrivals if needed to present the best possible profile ofrivals.
43Porter Competitive Model 5. Be sure to address the power implications of bothcustomers and suppliers. Power buys them what?6. Identify buyers and suppliers by categories versuscompanies.7. Summarize your Porter Model analysis.
44Computer IndustryWhy is this industry more of a challenge to evaluate using the Porter Competitive Model?
45Old Computer Industry Layer 5 Distribution Layer 4 Application SoftwareLayer 3OperatingSystemSoftwareLayer 2ComputingPlatformsLayer 1BasicCircuitryIBM DEC HP Fujitsu NCRFigure 3-3
46The New Computer Industry Layer 5DistributorsDirectSalesForceComputerDealersSuperStoresMassMerchandisersMailOrderValue-addResellersClubsOtherLayer 4ApplicationsSpreadsheetsWord ProcessorsDatabaseLotus Microsoft Excel Quattro ProLayer 3OperatingSystemSoftwareMS DOS Windows OS/ Unix AppleNovell Netware Banyan IBM OthersLayer 2ComputerPlatformsIBM Compaq Other Intel-Based PCs Apple Macs OtherLayer 1MicroprocessorIntel X Motorola RISC Power PCFigure 3-4
47Computer Industry Market Segments SupercomputersMainframesMinicomputersWorkstationsPersonal ComputersPeripheral EquipmentHardwareSoftwareServicesTelecom Networks?
48PC Industry Segment1. Passed $100 billion in sales in the first ten years.2. Growth and competition was based on industry standardslike never before.3. This has spawned thousands of niche companies.4. The PC has fundamentally restructured the ComputerIndustry.5. Industry pioneers believe the revolution is no more thanhalf over.
49Change Relative to Selling PCs 1. Languages2. Application Packages3. Connectivity and Compatibility4. Multimedia5. Groupware
50Computer IndustryOf the top fifteen companies in 1975, only four remain:IBMNECHPNCR
51The Old Computer Industry IBM and the BUNCHBurroughsUnivacNCRControl DataHoneywell
52PC Industry Change Atari Compaq Cromemco Dell Fortune Systems Gateway Wicat SystemsKayproMorrow DesignsOsborne ComputerVictor TechnologiesCompaqDellGatewayIBMHPNEC
53The Future Computer Industry 1. Traditional US Companies (large).2. Asian Electronic Companies.3. The New Strategy Companies.Why has the US continued to be the world leader in the computer industry?
54Porter Value Chain Basic Concept: 1. Deals with core business processes.2. Enables tracking a new idea to create a newproduct and/or service from origination all theway to customer satisfaction.
55Manufacturing Industry Value Chain Porter Value ChainManufacturing Industry Value ChainResearchandDevelopmentEngineeringProductionandManufacturingMarketingSalesandDistributionService
56Retail Industry Value Chain PartneringwithVendorBuyingManagingInventoryDistributingInventoryOperatingStoresMarketingandSelling
57Value Chain Things to Remember 1. Value to customer objective is not clear.2. Relay team concept is too time consuming and doesn’twork in the current competitive environment.3. Maximize the value-add activities and eliminate asmuch as possible the things that do not add value.4. Make sure that each step in the overall process (eachfunction) does things consistent with the overallobjective of value to customer.
58Generic Value Chain PRIMARY ACTIVITIES FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENTSUPPORT ACTIVITIESTECHNOLOGY DEVELOPMENTPROCUREMENTINBOUNDLOGISTICSOUTBOUNDLOGISTICSMARKETINGAND SALESOPERATIONSSERVICEPRIMARY ACTIVITIESAdapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. fromCOMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright1985 by Michael E. Porter.Figure 3-6
59Property and Casualty Industry Value Chain FIRMINFRASTRUCTURE-Financial Policy-Regulatory Compliance- Legal- AccountingHUMANRESOURCEMANAGEMENTActuaryTrainingAgentTrainingClaimsTrainingActuarial MethodsInvestmentPracticesProductDevelopmentMarket ResearchClaimsProceduresTECHNOLOGYDEVELOPMENTI/TCommunicationsPROCUREMENTPolicy RatingUnderwritingInvestmentIndependentAgent NetworkBilling andCollectionsPolicy SalesPolicy RenewalAgent Manage-mentAdvertisingClaims SettlementLoss ControlINBOUNDLOGISTICSOPERATIONSOUTBOUNDLOGISTICSMARKETINGAND SALESSERVICEIncluded with permission of Michael E. Porter based on ideas in Competitive Advantage: Creating and SustainingSuperior Performance, copyright 1985 by Michael E. Porter.Figure 3-7
60Technologies in the Value Chain Information System TechnologyPlanning and Budgeting TechnologyOffice TechnologyFIRMINFRASTRUCTUREHUMANRESOURCEMANAGEMENTTraining TechnologyMotivation ResearchInformation TechnologyProduct TechnologyComputer-Aided DesignPilot Plant TechnologySoftware Development ToolsInformation Systems TechnologyTECHNOLOGYDEVELOPMENTInformation Systems TechnologyCommunication System TechnologyTransportation System TechnologyPROCUREMENTTransportationTechnologyMaterial HandlingStorage andPreservationCommunicationSystem TechnologyTesting TechnologyInformationBasic ProcessTechnologyMaterialsMachine ToolsMaterials HandlingPackagingTesting TechnologyI/nformation Tech.TransportationTechnologyMaterial HandlingPackagingCommunicationsInformationMulti-MediaTechnologyCommunicationInformationDiagnostic andTesting TechnologyCommunicationsTechnologyInformationINBOUNDLOGISTICSOPERATIONSOUTBOUNDLOGISTICSMARKETINGAND SALESSERVICEAdapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. fromCOMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright1985 by Michael E. Porter., p. 167.Figure 3-8
61Summary of Chapter 3 The Porter Competitive Model for Industry Structure AnalysisBy Sandra Chu
62Chapter Objectives1. To identify significant forces in addition to direct competitors and customers that impact a company’s position within an industry.2. To understand the importance of basic objectives that a company has relative to the forces within the Competitive Model.3. To appreciate the power implications within the Porter Competitive Model.4. To understand the two basic strategies and three supporting strategies used by intra-industry rivals.5. To recognize industry characteristics that make the use of the Porter Competitive Model most effective.
63Strategic Business Unit Porter Competitive ModelPotentialNew EntrantsBargainingPowerof SuppliersIntra-IndustryRivalryStrategic Business UnitBargainingPowerof BuyersSubstituteProductsand ServicesSource: Michael E. Porter“Forces Governing Competition in IndustryHarvard Business Review, Mar.-Apr. 1979Figure 3-1
64Industry Structure and the Company Position How significant is the structure of the industry to existing companies and possible new entrants or providers of substitute products or services?What is the company’s relative position within the industry?Example: Oligopoly… would anyone want to enter it? NO!
65Porter Competitive Model Intra-Industry RivalryLogical starting point.Deals with the nature and degree of competition.Strategic Business Unit has two primary objectives:Create effective links with buyers and suppliersBuild barriers to new entrants and substitutes
66SBU and Competitive Strategies Primary Strategies:Differentiation: be different, be unique at meetingsome need valued by the customer.Low-Cost: be the cheapest.Supporting Strategies:Innovation: doing creative, often original things.Growth: stressing the importance of business growth.Alliances: competing through formalized relationships with other business enterprises.
67Porter Competitive Model Threat of New EntrantsTwo possible sources.Consideration of barriers to entry.Threat of Substitute Products or ServicesImportant to clearly understand the definition.Focus on viable alternatives.Determine attractiveness and deterrents of substitutes.
68The Value ChainSystematic method for examining the business processes of a firm and the interactions between them.Idea of a “chain” -- identify core business processes and how they can be linked.
69Value Chain 1. The ultimate objective is value to customer. 2. A focus needs to be on value-add activities and trying to eliminate as many activities as possible that do not add value to customer.3. Make sure that specific business functions keep in mind the ultimate objective and not become distracted by doing things that seem to make them look good.4. Remember that time has become a major competitive consideration and that a relay team concept can contradict this premise.
70ConclusionsThe Porter Competitive Model is key to understanding business competitiveness.It is important for a company to assess its position within an industry and relative to customers and suppliers.The model can be used to understand if IT can change the competitive environment of an industry.
71Possible Exam Questions 1. Identify an industry where information systems act as a significant barrier to entry and explain the significance of this barrier.2. Identify and explain the two basic strategies and three supporting strategies used by intra-industry rivals.3. What is the primary benefit to be derived through the use of the Porter Value Chain?4. Explain the logic of growth as a competitive strategy and provide two company examples where this was a key strategy.