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EBusiness strategy: how the internet has impacted competitive strategy MBA 501.

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Presentation on theme: "EBusiness strategy: how the internet has impacted competitive strategy MBA 501."— Presentation transcript:

1 eBusiness strategy: how the internet has impacted competitive strategy MBA 501

2 Focus on Assignment 2 This week we will look at the material needed to write Section 3c – Use relevant theory, (citing writers included in required readings) to explain how the Internet has impacted the competitive strategies available to a firm, and analyze how successful (or not) your particular firm has been in meeting the challenges posed by its eBusiness activities.

3 Theory around the impact of the internet on strategy and competitive advantage (all available via the course website) Porter (2001): Strategy and the Internet Tapscott (2001): Rethinking strategy in a networked world (or why Michael Porter is wrong about the internet”) Day et al (2003) Shakeouts in Digital Markets Laseter, Kirsch & Goldfarb (2007) Lessons of the last bubble Hagel, Seely Brown & Davison (2008) Shaping strategy in a world of constant disruption Zeleny (2010) Strategy as action: from Porter to anti-Porter

4 The “laws” that influence the impact of information technology and make it disruptive Moore’s Law: “over the history of computing hardware, the number of transistors on integrated circuits doubles approximately every two years.”“over the history of computing hardware, the number of transistors on integrated circuits doubles approximately every two years.” – So price / performance ratio doubles every 2 years – digital technology is disruptive because of this force Metcalf’s Law: “the value of a telecommunications network is proportional to the square of the number of connected users of the system (n 2 ).” aka the “network effect”“the value of a telecommunications network is proportional to the square of the number of connected users of the system (n 2 ).” Bandwidth Scaling Law (or Nielsen’s Law) “network connection speeds (to home users) will increase 50% per year, or double every 21 months.”“network connection speeds (to home users) will increase 50% per year, or double every 21 months.”

5 Internet influences Ask yourself the question as we look at these factors… Does this apply to my firm? If so….discuss the concept in your paper

6 Bocij et al. Business Information Systems. Prentice Hall. McNurlin, Sprague, & Bui Information Systems Management in Practice. Prentice Hall. Bargaining power of buyers Buyer / customer power is increased – probably the greatest threat to companies that engage in eBusiness – More choice – Lower dependency upon existing channels of distribution – More information (and from independent sources) – Greater transparency in terms of priceprice – Trend to “commoditization” or “commodification” Firms attempt to counteract this threat by attempting to “lock in” customers (raise switching costs) Although Zelengy suggests that strategy should be first and foremost customer focused (Amazon claims that this is the company’s major strength)

7 Lock-in strategy: Raising switching costs Raising switching costs entails lowering the usefulness or attractiveness of competing products or services There are various ways in which switching costs might be raised – find some examples of each? – Walled gardens – Contractual obligations – De facto standard – The network effect

8 Threat of substitute products or services (ie. “Disruption”) Significant threat – New digital products – Obsolescence of existing products Faster introduction of new products or services Related to the threat of new business models – some of which we talked about earlier Big bang disruption: Larry Downes (video) Big bang disruption: Larry Downes Question: Can Twitter be regarded as a substitute for the Globe and Mail?

9 Barriers to entry The internet and digitization increase the threat of new entrants Barriers to entry are reduced, enabling new competitors – Particular problem for retailers or service providers that have traditionally relied on a store-front presence or a mobile sales force – Fixed costs are lower – No physical distribution network, no manufacturing base needed for digital products – Example: financial services eg. INGDIRECTINGDIRECT Competitive intelligence more important – new entrants must be carefully watched or market share will be eroded Bocij et al. Business Information Systems. Prentice Hall. McNurlin, Sprague, & Bui Information Systems Management in Practice. Prentice Hall.

10 First movers and fast followers Internet services easier to initiate – makes it easier for “fast followers” – AltaVista -> Google – Napster -> iTunes – VisiCalc -> Lotus 123 -> Excel – Word Perfect -> Word – Netscape -> Internet Explorer – Apple Newton -> Palm Pilot -> Blackberry – IBM PC -> Compaq -> Dell – Double Click -> Google Ad Sense – Ofoto -> Flickr – Compuserve -> AOL -> Comcast & Verizon – MySpace > Facebook MySpace > Facebook Is your firm a first mover or a fast follower?

11 Bargaining power of suppliers Small firms can compete against larger firms – Level playing field Supplier bargaining power is decreased – the opposite situation from that of purchasers – B2B purchasers can raise the costs of suppliers by insisting that they use electronic / internet methods to process orders eg. WalMart and RFIDWalMart and RFID A firm can counteract this by broadening its markets to find new customers Bocij et al. Business Information Systems. Prentice Hall. McNurlin, Sprague, & Bui Information Systems Management in Practice. Prentice Hall.

12 Rivalry among existing firms Internet encourages commoditization – makes it harder to differentiate products or services Products are easier to duplicate Shorter product lifecycles = more intense rivalry Move to global market facilitated by the internet = increase in the number of competitors in the “marketspace ” Shift towards IT-based alliances that change rivalries – Value-chain versus value-chain rather than firm versus firm Bocij et al. Business Information Systems. Prentice Hall. McNurlin, Sprague, & Bui Information Systems Management in Practice. Prentice Hall.

13 Larry Downes: Three Emerging Forces Downes talks about “how 3 shock waves are overwhelming the “famous Five Forces” Digitization Globalization Deregulation “those who use the Five Forces model and who base their thinking on today's industry structure will never see the change coming in time” L. Downes. Beyond Porter. Context Magazine. Premier Issue. 1997

14 STRATEGIC DECISIONS RE EBUSINESS COMPETITIVE ADVANTAGE

15 Competitive advantage? An organization’s competitive advantage lies in those characteristics that allow it to outperform its rivals in the same industry or market Afuah and Tucci – What does “outperform” mean? – Number of customers / users? Profitability? Sales revenues? Ability to put a competitor out of business? Shareholder value? What else could it mean? Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice Hall.

16 Incumbents versus new entrants Incumbents – bricks and mortar firms New entrants – pure play firms – Those that enter markets that rest on the internet (completely new markets) – Those that use the internet to enter existing markets Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice Hall.

17 Understanding the impact of digital markets on incumbents and new entrant firms Breakthrough markets: new products or services that would not have been possible without the Internet – Examples: search engines, consumer portals, social media sites Re-formed markets: new technology doesn’t change the basic structure and functioning of the market – just makes it more efficient Source: Day et al. (2003) Shakeout in digital markets. California Management Review.

18 Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice Hall. Elements of eBusiness strategy: the process Stage 1: Situational analysis (where are we now?) Stage 2: Setting strategic objectives (what do we want to achieve?) Stage 3: Defining strategic direction: setting eBusiness priorities (what do we have to do to get there?) What DECISIONS have to be made? Stage 4: Implementation

19 Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice Hall. Stage 3 of the strategy process: Strategy definition - DECISIONS Driven by the vision and objectives formulated at Stage 2 of the strategy process A look at some of the DECISIONS for managers / entrepreneurs: 1.eBusiness priorities: “getting the right mixture of bricks and clicks” 2.Business structure? Restructure or not? 3.Business / revenue model 4.Market and product growth strategies 5.Developing capacity and capability

20 Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice Hall. DECISION: eBusiness priorities – Key strategic decision for any business is deciding whether the Internet will primarily COMPLEMENT or REPLACE existing channels for doing business – “Getting the right mixture of bricks and clicks” – Focus on sell side or buy side? – Limited involvement – putting a toe in the water? – Spin-off company or fully switching to eBusiness? – Same brand or new brand?

21 Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice Hall. DECISION: Business / revenue models Crucial in terms of potential for innovation and competitive advantage – Can Microsoft behave as a startup? New CEO Nadella says that it needs to behave more like “challengers” than followersNew CEO Nadella says that it needs to behave more like “challengers” than followers Flexibility – Business models are subject to change What happened to Blockbuster video? Could they change fast enough? Kodak? HP acquired EDS in 2008 and Autonomy in 2011 (consulting and enterprise software) – exited the smartphone and tablet business in 2011 to focus on "strategic priorities of Cloud, solutions and software with an emphasis on enterprise, commercial and government markets""strategic priorities of Cloud, solutions and software with an emphasis on enterprise, commercial and government markets" Is change of business model good or bad? What about “wait and see”?

22 Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice Hall. DECISION: market and product growth strategies Increase market penetration – Sell more products into existing markets eg. Google – core business = advertising. Google Develop new markets eg. Blackberry’s shift to consumer market in 2006 (Pearl) then India and other new markets in SE Asia in 2012/13 …and now? Develop new products (and new markets) eg. Apple expanded from computers to music players / online music Diversify product offerings: eg. eBay and Skype (bought for $2.6 billion in 2005) – Acquisition initially not seen as a good move. Eventually spun off as independent company, then sold to Microsoft in 2011 for $8.5 billion. Skype timeline (Reuters)Skype timeline

23 Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice Hall. DECISION: Developing capacity and capability Many firms need to develop new capabilities to implement strategy – Unfamiliarity with the technology and/or the market Leverage something we’ve got (eg. LandsEnd)LandsEnd Create the capability inhouse (recruit or train) Acquisition of another company

24 Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice Hall. Navigating the “capability gap”. Roberts and Berry model: Acquiring Capabilities Joint ventureVenture capital Educational acquisition Venture capital Educational acquisition Internet market capabilities development Acquisition Internal ventures Acquisitions Licensing Venture capital Educational acquisition Internal development (or acquisition) Internal technological capabilities development Acquisitions Licensing Strategic alliances Existing New but familiarNew but unfamiliar New but familiar New but unfamiliar TECHNOLOGY MARKET

25 Acquisitions – get something we need to compete? Educational or “learning” acquisitions – Strategic alliance - Microsoft buys 1.6% share in Facebook for $240 in 2007 – Acquisition of another company – News Corp (Fox Interactive Media) / MySpace for $770m in 2005MySpace Taking out the competition? Google/YouTube ($1.6 billion in 2006) Facebook / Instagram ($1 billion in 2012) Facebook / WhatsApp ($16 billion in 2014) New capacity Microsoft / Skype ($8.5 billion in 2011) eBay / PayPal ($2.2 billion in 2002)

26 Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice Hall. Step 4: STRATEGY IMPLEMENTATION Deciding on strategic direction is one thing, executing is quite another Need strong management – Often acquired from seasoned managers in offline setting (eg. Meg Whitman came to eBay from Hasbro, Eric Schmidt came to Google from Novell) – For traditional firm - need an eBusiness champion at the top Corporate culture and vision very important

27 Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice Hall. Pitfalls of strategy implementation Timing errors Lack of creativity Offering free services Overambition Poor situation analysis / poor market research Setting unrealistic or unclear objectives Poor strategy definition Problems with implementation / execution

28 Some industries that are undergoing rapid change due to Internet forces Recorded Music industry DVD rental industry Newspaper and magazine publishing Banking and financial services Book publishing FOR DISCUSSION 1.Select one of these industries 2.Which forces have impacted this industry and what have those impacts been? 3.What competitive strategies have been used to counteract these effects or to take advantage of them?


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