Business Strategy & IT
Minder Chen, Ph.D.
Minder.Chen@CSUCI.EDU
© Minder Chen, 1993-2013
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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, 1993-2013
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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, 1993-2013
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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, 1993-2013
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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)
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Five Competing Forces
YouTube Video: The Five Competitive Forces That Shape Strategy
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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.
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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, 1993-2013
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Entry threat/
Entry barriers
Emerging
technologies
http://www.youtube.com/watch?v=mYF2_FBCvXw
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Disruptive Technology
© Minder Chen, 1993-2013 http://en.wikipedia.org/wiki/File:Disruptivetechnology.gif
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Type of Innovations
• Sustaining: An innovation that does not affect
existing markets.
– Evolutionary: An innovation that improves a product
in an existing market in ways that customers are
expecting. (E.g., fuel injection)
– Revolutionary (discontinuous, radical): An innovation
that is unexpected, but nevertheless does not affect
existing markets. (E.g., the automobile)
• Disruptive: An innovation that creates a new
market by applying a different set of values,
which ultimately (and unexpectedly) overtakes an
existing market. (E.g., the lower priced Ford Model
T)
Bower, Joseph L. & Christensen, Clayton M. (1995). "Disruptive Technologies: Catching the Wave" Harvard Business
Review, January–February 1995
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Innovator’s Dilemma
• Good firms are usually aware of the innovations, but their
business environment does not allow them to pursue them
when they first arise, because they are not profitable
enough at first and because their development can take
scarce resources away from that of sustaining innovations
(which are needed to compete against current competition).
• "Generally, disruptive innovations were technologically
straightforward, consisting of off-the-shelf components put
together in a product architecture that was often simpler
than prior approaches. They offered less of what customers
in established markets wanted and so could rarely be
initially employed there. They offered a different package of
attributes valued only in emerging markets remote from,
and unimportant to, the mainstream."
* http://en.wikipedia.org/wiki/Disruptive_innovation and Christensen, Clayton M.
(1997), The innovator's dilemma: when new technologies cause great firms to fail,
Boston, Massachusetts, USA: Harvard Business School Press, ISBN 978-0-87584585-2.
© Minder Chen, 1993-2013
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Strategy and the Internet
© Minder Chen, 1993-2013
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Apple’s Entrance to Different Industries
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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, 1993-2013
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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, 1993-2013
Photo by Bobby Bank/Getty Images
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Customer Audit Approch
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Competitor Audit Approach
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Analyzing Competitive Forces and Strategic Positioning
http://qcao.ba.ttu.edu/ArcFall10/
applegate_ch01.pdf
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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
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Generic Strategies and Industry Forces
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Value Chain
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Internet and Value Chain Analysis
http://highered.mcgraw-hill.com/sites/dl/free/0073043559/314063/OBrien_13e_Chapter_2.pdf
© Minder Chen, 1993-2013
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Value Chain and ERP, CRM, SCM
Enterprise Resource
Planning
Supply Chain
Management
© Minder Chen, 1993-2013
Customer Relationship
Management
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Value Network Audit Approach
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Competitive Dynamcis (Model of Interfirm Rivalry):
Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability
Competitor
Analysis
Market
Commonality
Resource
Similarity
Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive
Action
Actor’s Reputation
Dependence on the
Market
Resource Availability
Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality
Feedback
http://www.wiziq.com/tutorial/381-Competitive-Dynamics
Outcomes
Competitive
Market Types
Slow, Standard
or Fast Cycle
Competitive
Outcomes
Sustained
Competitive
Advantage
Temporary
Advantage
Evolutionary
Outcomes
Entrepreneurial
Growth-Oriented
or Market-Power
Actions
Ch5-26
Five-Force Analysis vs. Competitive Dynamics
Level of analysis
Intellectual origin
Macro industry level
Industrial organization
economics
Focus
Competitive
advantage
Five forces that make up the
industry structure
Competitive advantage can be
created and sustained
Orientation
Industry/environment
Relationship
between firms
Competitive
strategy
Dynamic
consideration
Symmetrical
Competitive Dynamics
Competition is “dynamic” (or interactive)
and relative; actions/ responses matter for
firm performance
Micro firm and action level
Theoretical and empirical work in strategic
management extended from Schumpeter
and Austrian economics
Action/response dyad and/or individual
action
Competitive advantage is
time-dependent and ephemeral;
only relative advantages exist
Balanced market-resource (or externalinternal) consideration
Asymmetrical
Generic types
Repertoires of actions and responses
Comparison between two time
points
Exchange of actions and responses or
interactive behaviors between two firms
Basic premise
Five-Force Analysis
Industry structure determines
competition and profitability
© Minder Chen, 1993-2013
http://www.mingjerchen.com/dl/Academic_Papers/2012_AMA_Competitive_DynamicsThemes.pdf
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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
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Product/Market Positioning Audit Approach
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4-Step Process
• What are your mission/visions/goals?
• What are your strategies?
– Product/service strategies
– Marketing/branding strategies
– Technology strategies
• What are your methods for
implementing your strategies?
• How do you know you are making
progress towards your goals?
© Minder Chen, 1993-2013
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Five Questions
• Strategy is choice.
• 5 choices: a winning
aspiration, where to
play, how to win, core
capabilities, and
management systems.
• More specifically,
strategy is an
integrated set of
choices that uniquely
positions the firm in
its industry so as to
create sustainable
advantage and
superior value relative
to the competition.
Source
© Minder Chen, 1993-2013
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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
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Apple Inc.
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Stan Shih “Smile Curve”
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Components of a Business Model
http://qcao.ba.ttu.edu/ArcFall10/applegate_ch01.pdf
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Process in Perspective
Source: Process in Perspective (or “Tell me again, why are we doing this ‘process’ stuff?”), Geary Rummler
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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, 1993-2013
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An Example of Detail Value Chain Activities
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IT Permeates the Value Chain
Source: How information gives you competitive advantage.
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Industrial Value Chain
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Industry Value Chain
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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.
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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
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Integration
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