1 MP3 / MM740 Strategy & Information Systems Module 2: Strategy Concepts & Frameworks Fall 2001 © Copyright , John M. Gallaugher, Ph.D

2 Lecture Topics Porter’s 5 Forces / ICA Porter’s Value Chain Model Resource-based Theory –IS as resource & enabler Why Successful Firms Fail –disruptive technologies –options theory & technology experimentation Network Externalities Strategic Alignment

3 How Do We Know If An Asset Yields Sustainable Advantages? Rareness –Is the asset in limited supply or difficult to acquire? Value –Does the asset yield value to the firm/customers? Imperfectly Imitable –Is the asset impossible to imitate? Non-Substitutable –Is the asset without comparable substitutes?

4 SWOT Analysis Organizational Analysis Environmental Analysis Strengths Weaknesses Opportunities Threats

5 ICA: Industry & Competitive Analysis (Porter’s Five Forces) Industry Competitors Potential New Entrants Substitute products or services Power of Suppliers Power of Buyers

6 Competitor related threats –Growth industry w/above average profits –Fragmented industry - no clear leader / national brand –Low startup costs –Lack of scale economies –Low differentiation –Weak brands / low customer loyalty –Low customer switching costs –Available distribution networks –Technology & Regulatory shifts –Similar products/services/industries exist

7 Addressing Competitive Threats –Economies of Scale –Product Differentiation –Proprietary technology, learning curve/know-how, geography –Contrived Deterrence over-capacity, pre-announcements –Government Regulation of Entry –Switching Costs –Create / secure distribution channels –Preemptive Cannibalization –Alliances (with complementary firms & competitors)

8 Supplier related threats Small number of suppliers Suppliers sell highly differentiated products Suppliers not threatened by substitutes Firm is not an important customer for suppliers Suppliers threaten forward integration Information asymmetries

9 Addressing the supply-side Foster relationships with more suppliers Acquire & leverage information Lower product complexity - turn supplier products into commodities –be less dependent on a given supplier Integrate backwards Tightly integrate suppliers into your operations –make suppliers more dependent on your firm

10 Commoditizing Products Commodities Differentiated Goods PRODUCT COMPLEXITY LOW HIGH Information Systems Examples Computer Aided Design (CAD) Computer Aided Engineering (CAE) Computer Aided Manufacturing (CAM) Integrated Robotics

11 Buyer related threats Small number of buyers Buyers purchase commodity products Products sold to buyers consume a high portion of the product’s final cost Buyers are not earning significant economic profits Buyers threaten backward integration Information asymmetries

12 Addressing the buy side Seek or create new buyers / new markets Reduce buyer costs / assist buyer in expanding markets Differentiate products Acquire & leverage information Tightly integrate with buyers Integrate forwards

13 Differentiating Products Commodities Differentiated Goods LEVEL OF CUSTOMIZATION LOW HIGH Examples Customer-driven Ordering Systems Just In Time (JIT) Manufacturing Systems Information Systems

14 Value Chain InboundOperationsOutboundMarketingService logisticslogistics& Sales Infrastructure: general mgmt, planning, finance, IS HRM: recruiting, hiring, training, and development Tech. Development: R&D Procurement

15 Inbound Logistics Expediting raw materials to production Where IT can help –automated warehousing –just-in-time (JIT) inventory (tightening supplier links) –ex: Wal-Mart; Firms using supply chain software such as i2

16 Operations Transforming inputs into finished products Where IT can help –flexible manufacturing systems –robotics –ex: wearable computers - complex assembly; wireless tablets - CareGroup Healthcare

17 Outbound Logistics Storing and distributing finished products Where IT can help –automated order processing –electronic bills of lading (tighter buyer links) –ex: Logistics.com; supply-chain software

18 Marketing & Sales Promotion and sale of products Where IT can help –customer identification –standardizing the sales process –ex: Amazon.com & preference databases; Weyerhauser & configuration systems; Spiegel’s use of neural networks

19 Service Post-sale services to maintain and enhance products Where IT can help –need detection and remote servicing –automated dispatch of repair technicians –automated information distribution –ex: expert systems for repair & service; embedded self-diagnostic systems

20 Firm Infrastructure Support of the entire value-chain. Includes general management, legal services, finance, IS, and public relations Where IT can help –decision support systems –management information systems

21 Human Resource Management Recruiting, hiring, and training development Where IT can help –automated training –automated personnel scheduling

22 Technology Development Improving products and processes Where IT can help –Computer Aided Design (CAD) –Computer Aided Engineering (CAE) –Computer Aided Manufacturing (CAM) –Computer-based modeling (supercomputers) –ex. Drug modeling by pharmaceutical companies

23 Procurement Purchasing inputs supplies Where IT can help –online procurement systems –inventory locator systems –ex: web-based office supply & travel procurement systems

24 IS as a Resource Competitive advantage is sometimes achieved through multiple resources IS can be an enabler –enabling latent advantages in an organization that are not effectively utilized IS can create new resources –reshaping market dynamics –over time (e.g. databases)

25 IS as an Enabler IS resource yields competitive advantage –(ex. Alcoa) Competitive Advantage Scale, World-leading mfg. & sales Integrated IS across plants / offices

26 Creating / Enhancing Resources Created when resources combine for additional benefit. –e.g. embedded technology Competitive Advantage Service Network Monitoring IS R & D Exceptional Service Superior Products

27 Time-Based Resources Resources may yield additional advantages/ opportunities over time Competitive Advantage Customer Database Growth Over Time

28 HyperCompetition Profits from a competitive advantage launch exploitation counter-attack Profits from a competitive advantage

29 Product Performance Time Performance demanded at the high end of the market Performance demanded at the low end of the market Progress due to sustaining technologies Disruptive technological innovation Progress due to sustaining technologies Existing profit, staffing, and customer pressures stall innovation Traditional market & financial analysis cause blindness Why Do Leaders Fail?

30 Creating the Killer-App Blindness & Pressures –existing customers & market pressure –financial performance measures Identify Technologies –external conversations (VCs, academics, technologists) –internal conversations (engineering, mktg, planning) Managing an Option Portfolio of Innovations –separate organizations –hedge financial risk, market focus, incentive

31 Network Externalities (a.k.a. Network Effects, Metcalfe’s Law) A product or service becomes more valuable as its installed base expands Why do consumers care about installed base? –Exchange opportunities –Stability –Extrinsic, complementary benefits More Exchange Opportunities More Members

32 Why are Markets for Network Goods Different? Market competition occurs very early and is particularly fierce Markets are ‘tippy’ and subject to bandwagons Markets exhibit monopolistic tendencies The ‘best’ technology or highest quality product doesn’t always win

33 Success Factors for Large Scale IS Business Case –benchmark, cost justify (e.g. unplug mainframes) Leadership –from the highest levels (e.g. success at Owens Corning, failure at Westinghouse) Staffing –largely from business, not IT (users know the process) –‘compensation handcuffs’ (e.g. end of deployment bonuses, performance review tied to usage) –experienced consultants - check refs., clients Manage complexity –justify changes & use methodologies