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- 1 - © Minder Chen, Business Strategy & IT Minder Chen, Ph.D.
- 2 - © Minder Chen, Strategy and IS Industry Structure (5 Competing Forces) Competitive Strategy Value Chain Analysis Business Process Design / Reengineering Information Systems
- 3 - © Minder Chen, 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.
- 4 - © Minder Chen, 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.
- 5 - © Minder Chen, New Entrances or Substitutes Rivalry is often fierce in commodity industries Photographic film industry: Kodak and Fuji –Key competing force –Polaroid Substitutive products/services 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. INSIDE MICROSOFT (Part 1)INSIDE MICROSOFT (Part 1) INSIDE MICROSOFT (Part 2)INSIDE MICROSOFT (Part 2)
- 6 - © Minder Chen, Five Competing Forces YouTube Video: The Five Competitive Forces That Shape Strategy
- 7 - © Minder Chen, 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.
- 8 - © Minder Chen, 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
- 9 - © Minder Chen, Emerging technologies Entry threat/ Entry barriers
© Minder Chen, Apple’s Entrance to Different Industries
© Minder Chen, 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, 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. Photo by Bobby Bank/Getty Images
© Minder Chen, 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.
© Minder Chen, Porter Generic Strategies Cost Leadership: High volume and low profit margin Differentiation strategy: High margin/price, low volume Source: read the comments
© Minder Chen, Generic Strategies and Industry Forces
© Minder Chen, 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. Nicholas Carr, "Does IT Matter," Harvard Business Review, May 2003, pp (CSUCI Library Online Database) and ResponsesCSUCI Library Online DatabaseResponses
© Minder Chen, Value Chain
© Minder Chen, Value Chain Analysis
© Minder Chen, Apple Inc.
© Minder Chen, Stan Shih “Smile Curve” IBM Leads the Way in the Post-PC EraIBM Leads the Way in the Post-PC Era Why IBM exited the PC market? Source:
© Minder Chen, Stan Shih “Smile Curve”
© Minder Chen, Process in Perspective Source: Process in Perspective (or “Tell me again, why are we doing this ‘process’ stuff?”), Geary Rummler
© Minder Chen, Business Processes The order management process consists of several business processes and crosses the boundaries of traditional business functions.
© Minder Chen, 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 Clothes 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. Service 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 Technology is integrated to support all primary activities. Zara’s IT staff works with vendor to develop automated conveyor to support distribution activities. Purchasing Vertical integration reduces amount of purchasing needed.
© Minder Chen, An Example of Detail Value Chain Activities
© Minder Chen, Value Chain and ERP, CRM, SCM Supply Chain Management Customer Relationship Management Enterprise Resource Planning
© Minder Chen, IT Permeates the Value Chain Source: How information gives you competitive advantage.
© Minder Chen, Industrial Value Chain
© Minder Chen, Industry Value Chain
© Minder Chen, Step Process What are your goals? What are your strategies? What are your methods for implementing your strategies? How do you know you are making progress towards your goals?
© Minder Chen, Integration
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