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Partnership for Performance
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Fisher logo
The Business Context
Dr. Rajiv Ramnath
Director, CETI
Department of Computer Science and Engineering, College of Engineering
The Ohio State University
Ramnath.6@osu.edu
http://www.ceti.cse.ohio-state.edu
fisher.osu.edu
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Agenda
1. How does industry structure define
business strategy?
2. How does an enterprise pick where to
do better?
3. How do we translate strategy into
execution?
Discussion:
•
Why are we doing this? What is the connection to Enterprise
Software Engineering?
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Understanding Industry
Structure and Competition
Porter’s 5 Forces Model
College of Engineering
The Ohio State University
Interplaying Elements of Industry Structure
Note: These Forces are NOT independent
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Characterizing the 5 Forces – Buyer Power
•
Availability of choices: More if higher
•
•
•
Buyer volume: More if higher
•
•
And replace the supplier. E.g. Auto industry
Pull-through: More if higher
•
•
E.g. Walmart
Ability to backward integrate: More if higher
•
•
Less price sensitive if impact is higher. E.g. steel on aircraft manufacturers
Availability of information to the buyer: More if Higher
•
•
Degree of integration/dependence with seller
Product differences
Impact of supplied product on quality: Less if higher
•
•
Makes buyers cost sensitive. E.g. Chips for the computer industry
Buyer switching costs: Less if higher
•
•
•
E.g. Walmart
Proportion of buyer cost - price vs. total purchases, buyer profit: More if
Higher
•
•
Buyer concentration vs. firm concentration
Substitute products
Dependence on buyer to pull the supplier’s product through
Brand identity, ability to influence decision makers: Less if higher
•
E.g. INTEL inside, vs. DELL
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Characterizing the 5 Forces – Supplier Power
• Buyer switching costs: More if higher
•
Differentiation of inputs
• Lack of substitute inputs: More if fewer
•
E.g. Gasoline
• Fragmentation of buyers: More if higher
•
Availability of choices
• Importance of volume to supplier: Less if higher
• Supplier cost relative to purchases: Less if higher
• Threat of forward integration relative to backward
integration: More if higher
NOTE: Labor is a supplied good too
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Characterizing the 5 Forces – Threat of New Entrants
•
Economies of scale: Less if higher
•
•
•
Proprietary capabilities: features, components, technology, experience: Less if
Higher
•
•
Shelf space in grocery stores, contracts with car dealerships
Government regulation: Less if higher
•
•
•
Relationships to sources of investment
Access to distribution: More if higher
•
•
Especially with integrated products
Capital requirements: Less if higher
•
•
Perceived or real tailoring to customer needs
Switching costs to customers: Less if higher
•
•
Capabilities should not be easily acquired
Brand identity, customer loyalties, product tailoring to customers: Less if
higher
•
•
Permit lower per-piece margins
Entry deterring price
Certifications
Standards
Expectation of retaliation: Less if higher
•
Market history
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Characterizing the 5 Forces – Threat of
Substitutes
• Relative price/performance/perception of
substitutes: More if higher
•
In particular trends with respect to existing products
• Buyer propensity to switch: More if higher
•
Buyer need for variety vs. stability
• Switching costs of customers: Less if higher
• Ability of firms to collectively position their
products against substitutes: Less if higher
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Characterizing the 5 Forces - Rivalry
• Numerous, balanced competitors => Less competition
•
No clear market leader
• Diversity of competitors and their motivations
•
•
No clear “rules of the game”
High strategic stakes for some
• Slow industry growth
•
Reliance on market share for growth
• High fixed or storage costs => Less competition if
more
•
Also: Capacity augmented in large increments
• High exit barriers
•
Especially when coupled with low entry barriers
– e.g. home ownership
• Lack of product differences
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So HOW do firms compete?
For this we have to study their “value
chain ” – or the internal operations of
the company.
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What is the Value Chain?
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Value chain for a personal computer manufacturer
Inbound logistics
Purchase components
Purchase raw materials
Production
R&D
Engineering/product design
Order components
Order raw materials
Manufacture products
Outbound logistics
Inventory management
Order entry
Order fulfillment
Sales &
marketing
Customer
service
Information technology infrastructure
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Each value chain process consists of sub-processes
Inbound
logistics
Production
R&D
Engineering/product design
Order components
Order raw materials
Manufacture products
Design/build/maintain production line
Manufacture components
Configure/setup production runs
Deliver materials to production line
Manufacture subassemblies
Configure/setup production runs
Deliver components to production line
Assemble final product
Configure/setup production runs
Deliver subassemblies to production line
Outbound
logistics
Sales &
marketing
Customer
service
Information technology infrastructure
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How Firms Compete
Goal: Create a sustainable, defensible position
within the market
Generic Strategies:
•
Cost
– Leadership is key
•
Differentiation
– Sustainable differentiation is key
•
Focus
– Cost or differentiation in a target segment
– Targets competitor sub-optimization
•
Tailor value chain to strategy
NOTE: Firms rarely risk damage to the industry
structure
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Competitive Advantage is Achieved by Optimizing the
Value Chain
The value chain shapes and reflects the industry structure
The value chain shapes the organizational structure – optimize both
•
E.g. Apple: Close interaction between marketing and product design
Each activity in the value chain is a point of differentiation –
optimize these activities
•
•
Examine and optimize steps
Examine, optimize and exploit linkages
– Linkages may be across firms as well
Scope affects the value chain – optimize the scope
•
•
•
Segment scope
Integration scope
Geographic scope
• Industry scope
Discussion: How can IT help?
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References
• How Competitive Forces Shape
Strategy, Michael Porter (Electronic
copy provided)
• http://www.geocities.com/plarmuseau/m
porter3.htm
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Connecting Strategy to
Execution
The Balanced Scorecard
College of Engineering
The Ohio State University
Goals of the Balanced Scorecard
Strategy has to be:
1.
2.
3.
4.
5.
Defined based on the organization and its
environment (Porter’s Model)
Translated into operational terms
Documented and communicated in an
understandable manner through the organization
Executed in a unified manner through the
organization
Execution must be measured and used to
continuously improve the strategy, design,
communication and execution, using “forward
looking” metrics”
Items (2) - (5): Addressed by the Balanced
Scorecard
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The Strategic Management Process
Translating the
Vision
Linking and
Communicating
The Balanced
Scorecard
Feedback and
Learning
Business
Planning
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What is the Balanced Scorecard?
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Question: What area of the Value Chain is being targeted?
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How to Apply the Balanced Scorecard
• Align activities to a strategic goal
•
E.g. cost reduction vs. customer intimacy vs. new
product development
• Tie it to the key areas in the value chain.
• Bring in “forward looking” measures rather
than backward looking financial metrics
•
E.g. number of new leads
• Include “intangible” assets in the strategy
•
Experience, capabilities in the organization
– E.g. Nationwide’s agents
Discussion:
•
•
How is this connected to Porter’s Model?
What role can IT play in achieving this?
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References
• Using the Balanced Scorecard as a
Strategic Management System, Kaplan
and Norton (Electronic copy)
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Thank you!
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