Business Strategy & IT
Minder Chen, Ph.D.
Minder.Chen@CSUCI.EDU
© Minder Chen, 1993-2012
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Strategy and IS
Industry Structure
(5 Competing Forces)
Competitive
Strategy
Business Process
Design / Reengineering
Value Chain
Analysis
Information
Systems
© Minder Chen, 1993-2012
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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.
© Minder Chen, 1993-2012
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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, 1993-2012
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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, 1993-2012
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Five Competing Forces
YouTube Video: The Five Competitive Forces That Shape Strategy
© Minder Chen, 1993-2012
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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.
© Minder Chen, 1993-2012
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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, 1993-2012
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Entry threat/
Entry barriers
Emerging
technologies
© Minder Chen, 1993-2012
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Apple’s Entrance to Different Industries
© Minder Chen, 1993-2012
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Apple
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•
•
•
•
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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, 1993-2012
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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, 1993-2012
Photo by Bobby Bank/Getty Images
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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.
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.
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.
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.
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.
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Threat of
Substitute
Products
Industrial
Competitors
© Minder Chen, 1993-2012
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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, 1993-2012
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Generic Strategies and Industry Forces
© Minder Chen, 1993-2012
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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, 1993-2012
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Value Chain
© Minder Chen, 1993-2012
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Value Chain Analysis
http://highered.mcgraw-hill.com/sites/dl/free/0073043559/314063/OBrien_13e_Chapter_2.pdf
© Minder Chen, 1993-2012
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Apple Inc.
© Minder Chen, 1993-2012
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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, 1993-2012
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Stan Shih “Smile Curve”
© Minder Chen, 1993-2012
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Process in Perspective
Source: Process in Perspective (or “Tell me again, why are we doing this ‘process’ stuff?”), Geary Rummler
© Minder Chen, 1993-2012
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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, 1993-2012
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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
Marketing and
Sales
Service
Clothes move on miles of automated conveyor belts at distribution centers and reach stores
within 48 hours.
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.
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
Purchasing
Technology is integrated to support all primary activities. Zara’s IT staff works with vendor to
develop automated conveyor to support distribution activities.
Vertical integration reduces amount of purchasing needed.
© Minder Chen, 1993-2012
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An Example of Detail Value Chain Activities
© Minder Chen, 1993-2012
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Value Chain and ERP, CRM, SCM
Enterprise Resource
Planning
Supply Chain
Management
© Minder Chen, 1993-2012
Customer Relationship
Management
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IT Permeates the Value Chain
Source: How information gives you competitive advantage.
© Minder Chen, 1993-2012
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Industrial Value Chain
© Minder Chen, 1993-2012
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Industry Value Chain
© Minder Chen, 1993-2012
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4-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, 1993-2012
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Integration
© Minder Chen, 1993-2012
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