Strategy and

The Internet
CUHK Business School
Greta Zhang

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2
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In the Wave
of
Information
Technology

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 The 1st wave of
A Brief
NOW, its the 3rd
IT The 2nd wave of IT wave of IT
1960s to 1970s 1980s to 1990s IT is becoming an

History of Automated
individual
Coordination and
integration across
integral part of the
product itself

IT in Biz activities in
the value chain, individual activities,
with outside
Michael E. Porter
and Jim
Heppelmann
from ordering
processing and suppliers, channels, How Smart,
Connected Products
bill paying to and customers. are Transforming
computer-aided Michael E. Porter
design and Competition
manufacturing Strategy and the
resource Internet
planning...

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 WHOS WHO?
WHOS MICHAEL E.PORTER?

Does
strategy
(still)
matter?

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 WHOS WHO?
WHOS MICHAEL E.PORTER?
Bishop William Lawrence University Professor at
Does Harvard Business School
strategy Leading authority on competitive strategy
(still)
matter? His work is recognized in many governments,
corporations and academic circles globally

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Introduction
Smart Connected Products

New Strategy

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Part I

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Does
Does the Internet render
strategy established rules about
(still) strategy obsolete?
matter?

-Michael E. Porter

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 YES,
STRATEGY
MATTERS.
Does
strategy
(still)
matter?

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 The Idea in Brief
Porter argues (2001):
Does
strategy Strategy matters.
(still) The Internet makes strategies
matter? more vital than ever.

BUT Why and How?

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 CONTENTS
The Basic Concept of Porters
Does Competitive Model
strategy
(still) The Application of the Internet in the
matter? Value Chain

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 OBJECTIVES
Gain Competitive Advantage
Does
strategy Understand the Forces that Influence
(still) Competitive Advantage

matter? Know How to Use Models to Do an Objective

Evaluation

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 QUESTIONS TO GET YOU PONDERING
Can the Internet or information technology build in
cost and make difficult for a customer to switch
Does suppliers?

strategy Can it change the basis for competition within the

(still) industry?

matter? Can it change the balance of power in the

relationship that a company has with customers or
suppliers?

Can it provide the basis for new product and services,

new markets or other new business opportunities?
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 A framework to analyze the level of
competition within an industry and business
strategy development

An
Overview of
Porter Five
Forces
Analysis

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 I. Threat of New Entrants
II. Threat of Substitute Products or Services
Porter Five
Forces III. Bargaining Power of Buyers
Analysis IV. Bargaining Power of Suppliers
V. Intensity of Competitive Rivalry

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 What does each force mean?
Why analyze all five competitive forces?

1 Gain a complete picture of what is influencing

profitability in your industry

Porter Five
Forces
Analysis 2 Identify game-changing trends early

Spot ways to handle constraints on

3 profitability-or even to shape the forces in your
favor

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Awareness of competitive forces
can help a company stake out a
position in its industry that is
less vulnerable to attack.

-Michael E. Porter

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 I. Threat of New Entrants

Profitable markets that yield high returns will attract new firms.
This results in many new entrants, which eventually will decrease
profitability for all firms in the industry.

Porter Five Entrants, armed with new capacity and starving for market share,
Forces can ratchet up the investment required for you to stay in the
game.
Analysis
Factors that can have an effect on how much of a threat new
entrants may pose include:

The existence of barriers to entry (patents, rights, etc.)

Government policy
Capital requirements

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 II. Threat of Substitute Products or Services

The existence of products outside of the realm of the common

product boundaries increases the propensity of customers to
switch to alternatives.
Porter Five
Forces Substitute offerings can lure customers away.

Analysis Factors that can have an effect on how much of a threat substitute
products or services may pose include:

Buyer propensity to substitute

Relative price performance of substitute
Buyer switching costs

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 III. Bargaining Power of Buyers
The bargaining power of buyers is described as the market of
outputs: the ability of customers to put the firm under pressure,
which also affects the customer's sensitivity to price changes.

Porter Five Customers can force down prices by playing you and your rivals
against one another.
Forces
Analysis Factors that can have an effect on how much of bargaining power
of buyers may pose include

Buyer concentration to firm concentration ratio

Degree of dependency upon existing channels of distribution
Bargaining leverage

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 IV. Bargaining Power of Suppliers
The bargaining power of suppliers is described as the market of
inputs. Suppliers of raw materials, components, labor, and services
to the firm can be a source of power over the firm when there are
few substitutes.
Porter Five Suppliers can constrain your profits if they charge higher prices.
Forces
Analysis Factors that can have an effect on how much of bargaining power
of suppliers may pose include:

Impact of inputs on cost or differentiation

Presence of substitute inputs
Strength of distribution channel

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 V. Intensity of Competitive Rivalry
Porters intensity of rivalry in an industry affects the competitive
environment and influences the ability of existing firms to achieve
profitability.
Porter Five
Forces Low intensity of rivalry makes an industry more attractive and
increases profit potential for the firms already competing within
Analysis that industry.

High intensity of rivalry makes an industry less attractive and

decreases profit potential for the firms already competing within
that industry.

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Porter Five
Forces
Analysis

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 Example:
Heavyweight Motorcycle Manufacturing Industry in North
American Market

Bargaining Power of Suppliers: Potential New Entrant:

Parts Manufacturers Foreign Manufacturers
Porter Five Electronic Components
Forces
New Startup
Intra-Industry Rivalry
Machine Tool Vendors
Analysis SBU: Harley-Davidson

Rivals: Honda, BMW,

Substitute Products: Bargaining
Suzuki, Yamaha Power of Buyers:

Automobiles Law Enforcement

Public Transportation Young Adults

Bicycles Military Use

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Porter Five Example: Mobile Phone Industry
Forces
Analysis

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 Two fundamental factors that determine profitability

Sustainable
How can the Industry Structure Competitive
Internet be Advantage
used to
create
economic
value? It determines the
It allows a company to
profitability of the
outperform the
average competitor.
average competitor.

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 Whether an industry has structural attractiveness or
nor is determined by five competitive forces.

1. The intensity of rivalry among existing

The Internet competitors
and Industry 2. The barriers to entry for new competitors
Structure 3. The threat of substitute products or services
4. The bargaining power of buyers
5. The bargaining power of suppliers

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 In combination, these forces determine how
the economic value created by any product,
service, technology, or way of competing.

The Internet
and Industry
Structure SO how on earth does the
internet influence industry
structure, and thus
profitability?

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How the
Internet
Influences
Industry
Structure

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 Threat of Substitute Products
or Services

How the
Internet
Influences Positive implication:
Industry By making the overall industry more efficient, the
Structure Internet can expand the size of the market.

Negative implication:
The proliferation of Internet approaches creates new
substitution threats.

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 Barriers to Entry

How the
Internet
Negative implications:
Influences
A flood of new entrants has come into many
Industry industries
Structure Internet applications are difficult to keep proprietary
from new entrants
Reduce barriers to entry such as the need for a sales
force, access to channels, and physical assets

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 Bargaining Power of Suppliers

How the
Internet
Influences Negative implications:
Industry The Internet provides a channel for suppliers to reach
Structure end users, reducing the leverage of intervening
companies
Reduced barriers to entry and the proliferation of
competitors downstream shifts power to suppliers

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 Rivalry among Existing
Competitors

How the
Internet
Negative implications:
Influences
Migrates competition to price
Industry Lower variable cost relative to fixed cost, increasing
Structure pressures for price discounting
Reduces differences among competitors as offerings
are difficult to keep proprietary

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 Bargaining Power of Buyers

How the
Internet
Positive implication:
Influences
Eliminates powerful channels
Industry Improves bargaining power over traditional channels
Structure
Case: Negative implications:
automobile
Shifts bargaining power to end consumers
retailing
Reduces switching costs
Ebays auction biz

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 The Internets Influence on Industry Structure

The Internet powerfully influences industry structure.

Industry structure drives from the basic five forces of
competition.
The internet can affect these forces through many
Key Points ways.
- Its an open system whose technological advances
level most industries playing fields-thus
intensifying competitive rivalry and reducing entry
barriers.
- It dramatically increases available information,
shifting bargaining power to buyers.

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 Two fundamental factors that determine profitability

Sustainable
How can the Industry Structure Competitive
Internet be Advantage
used to
create
economic
value? It determines the
It allows a company to
profitability of the
outperform the
average competitor.
average competitor.

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 How do individual companies to set themselves
apart from the pack and to be more profitable
The than the average performer?
Internet and
Competitive Through achieving a sustainable competitive advantage
Operate at a lower COST
Advantage Command a premium PRICE
Do both!

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 The advantages of COST and PRICE can be achieved in
two ways.

Do the same things as your

The Operational competitors do but do better
Internet and Effectiveness Better technologies, superior
inputs, a more effective
Competitive management structure...

Advantage
Do things different from competitors
Strategic Deliver a unique type of value to
Positioning customers
A different array of services, or
different logistical arrangements

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 Operational Effectiveness
The Internet
affects The Internet is a powerful tool for enhancing
Operational operational effectiveness.
- Ease and speed the exchange of real-time
Effectiveness information
and Strategic - Improve the entire value chain
Yet simply improving operational effectiveness does not
Positioning provide a competitive advantage.
in different To sustain operational advantages, Strategic
ways. Positioning becomes extremely important-to gain a
cost advantage or price premium by competing in a
distinctive way.

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1 2 3 4 5 6
Right Goal Value Distinctive Trade-Offs Fit Continuity
Proposition Value
Chain

A company Strategy defines

A strategy
It MUST start Strategy needs to be must abandon how all the
must enable it reflected in a
with the to deliver a
or forgo some elements of Strategy
distinctive value chain.
right goal: product what a company involves
value The way a company
conduct features, does fit continuity of
SUPERIOR proposition, or
manufacturing, services or together. Fit
LONG-TERM set of benefits direction.
logisticsmust be activities in makes a
RETURN ON different from configured. order to be strategy harder
INVESTMENT the rest offers. Not simply adopt the
best practices unique at to imitate.
others.

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 The Internets Influence on Sustainable
Competitive Advantage

Sustainable competitive advantage comes from

operational effectiveness or strategic positioning.
Key Points
Most companies define Internet competition in
terms of operational effectiveness. But because
competitors can easily copy a firms advances in
these areas, strategic positioning becomes most
important.

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 How to understand the influence of information
technology on companies?
The

Internet
The value chain is a framework for identifying

and the Theallvalue chainand analyzing how they

these activities
affect both a companys costs and the value
Value Thedelivered
set oftoactivities
buyers. through which
Chain a product or services is created and
delivered to customers

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Prominent
Applications
of the
Internet in
the Value
Chain

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 How to understand the influence of
information technology on companies?

The Because every activity involves the creation,

Internet processing, and communication of information,
information technology has a pervasive influence
and the on the value chain.
Value The special advantage of the Internet is the ability
Chain to link one activity with others and make real-time
data created in one activity widely available, both
within the company and with outside suppliers,
channels, and customers.

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 Is the Internet cannibalistic?
Will it replace all conventional ways of doing
business and overturn traditional advantages?
The Internet
as Some real trade-offs can exist between Internet and
Complement traditional activities.
? But modest in most industries.

Case: Walgreens and W.W.Grainger

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The Internet The Internet makes it easier to maintain strategic
as
positioning.

Complement How?

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The Internet
as
Complement
1

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The Internet
as
Complement
2

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The Internet
as
Complement
3

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 Strategies matter and still matter.

The Internet makes strategies more

vital than ever.
Conclusion
Its all about how to use the Internet
and traditional methods to achieve the
greatest strategic advantage.

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Smart, Connected
Products, Competition
and Strategy
Part II
The Current Wave of Information Technology

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CONTENTS
What is Smart, Connected Product?

What is the effect of smart, connected

products on industry structure?

What are the new strategic choices facing

companies?

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What is
Smart,
Connected
Product?

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 Smart, Connected Products are
Not just products that are composed only of
mechanical and electrical parts
What is SYSTEMS that combine hardware, sensors,
Smart, data storage, microprocessors, software, and
Connected CONNECTIVITY
Product? More new functionality
Greater reliability
Higher product utilization
Higher capabilities that cut across and
transcend traditional product boundaries
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What are the core
elements of smart,
connected
products?

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What are
the core

3
elements
of smart,
Physical Smart Connectivity
Components Components Components
connected
products?

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 1
What are
the core Physical components
elements comprise the products
of smart,
Physical
Components mechanical and electrical
connected parts.
products?

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 2
What are Smart components comprise
the core the sensors, microprocessors,
elements data storage, controls,
of smart,
Smart
software and an embedded
Components
connected operating system and
products? enhanced user interface.

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 3
What are Connectivity components
the core comprise the ports,
elements antennae, and protocols
of smart,
Connectivity
enabling wired or wireless
Components
connected connections with the
products? product.

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 3
What are Connectivity takes three
the core forms.
elements One-to-one
of smart,
Connectivity
One-to-many
Components
connected Many-to-many
products?

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The changing nature of
products leads to the
changing value chains!

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The What does it mean?
changing The NEW types of products
nature of
Alter industry structure and the nature of
products competition
leads to Bring NEW competitive opportunities and
the NEW threats
changing Reshape industry boundaries
Create entirely NEW industries
value
chains.

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 How do smart, connected products
reshape structure?
Reshaping
Industry Whats the effects of smart, connected
products on industry competition and
Structure profitability?

Use Porters Five Force Model to

examine their impact on industry
structure

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 A framework to analyze the level of
competition within an industry and business
strategy development

An
Overview of
Porter Five
Forces
Analysis

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 The smart, connected products can increase buyer
power by giving buyers a better understanding of
true product performance, allowing them to play
one manufacturer off another.
Bargaining Buyers may also find that having access to product
Power of usage data can decrease their reliance on the
Buyers manufacturer for advice and support.

Product as a service business models or product-

sharing services can increase buyers power by
reducing the cost of switching to a new
manufacturer.
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 The expansion of capabilities in smart, connected
products can tempt companies to get into a feature
and function arms race with rivals.
Rivalry
among Rivalry among competitors can increase as smart,
Competitors connected products become part of broader
product systems.

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 High fixed costs of more-complex product design,
embedded technology, and multiple layers of new IT
infrastructure
Threat of
New Broadening product definitions can raise barriers to
Entrants entrants even higher

Increase buyer loyalty and switching costs, further

raising barriers to entry

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 Create new types of substitution threats, such as
wider product capabilities that subsume
conventional products
Threat of
New business models enabled by smart, connected
Substitutes products can create a substitute for product
ownership, reducing overall demand for a product

Offer superior performance, customization, and

customer value relative to traditional substitute
products
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 Software reduces the need for physical tailoring and
the hence the number of physical component
varieties

Smart, connected products often introduce new

Bargaining suppliers that manufacturers have never needed
Power of before: providers of sensors, software, connectivity,
Suppliers embedded operating systems, and data storage

New suppliers of the technology stack for smart,

connected products also gain greater leverage given
their relationships with end users and access to
product usage data.
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 Blurry Industry Boundaries and Diminishing
Role of Firm
Smart, connected products does not only reshape competition
New within an industry, but also expand the definition of the industry.

Industry The competitive boundaries of an industry has been widened as a

Boundaries
set of related products that together meet a broader needs. The
function of one product is now optimized with other related
and products.

System of So the basis of competition shifts to the performance of the

Systems broader product systems.

This leads to that the firm is just one actor.

The manufacturer now can offer a package of services and

equipment that optimize overall results.
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 From Product to System of Systems

New
Industry
Boundaries
and
Systems of
Systems

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How can
companies
achieve
sustainable Do a review!
competitive
advantage
in a shifting
industry
structure?

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 Two fundamental factors that determine profitability

Sustainable
Industry Structure Competitive
Advantage
Review

It determines the
It allows a company to
profitability of the
outperform the
average competitor.
average competitor.

77
 How do individual companies to set themselves
apart from the pack and to be more profitable
than the average performer?

Review Through achieving a sustainable competitive advantage

Operate at a lower COST
Command a premium PRICE
Do both!

78
 The advantages of COST and PRICE can be achieved in
two ways.

Do the same things as your

Operational competitors do but do better
Effectiveness Better technologies, superior
Review inputs, a more effective
management structure...

Do things different from competitors

Strategic Deliver a unique type of value to
Positioning customers
A different array of services, or
different logistical arrangements

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 The foundation for competitive advantage is
How can operational effectiveness.
companies
achieve Yet OE is hardly a source of sustainable
sustainable competitive advantage.
competitive
advantage Because competitors will implement the same
in a shifting best practices and catch up.
industry
structure? So to define a distinctive strategic positioning
becomes extremely important.

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 Strategic positioning is all about doing things
differently.

So A company must choose how it will deliver

Strategies unique value to the set of customers.
Matter !
Strategy requires making trade-offs: deciding
not only what to do but what not to do.

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 10 NEW Strategic Choices
1. Which set of smart, connected product capabilities
and features should the company pursue?
2. How much functionality should be embedded in the
Implications
product and how much in the cloud?
3. Should the company pursue an open or closed
for Strategy system?
4. Should the company develop the full set of smart,
connected product capabilities and infrastructure
internally or outsource to vendors and partners?
5. What data must the company capture, secure, and
analyse to maximize the value of its offering?

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 10 NEW Strategic Choices
6. How does the company manage ownership and
access rights to its product data?
7. Should the company fully or partially disintermediate
Implications distribution channels or service networks?
for Strategy 8. Should the company change its business model?
9. Should the company enter new businesses by
monetizing its product data through selling it to
outside parties?
10. Should the company expand its scope?

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Q1
Which set of Step 1 Decide which features will deliver real value to
smart,
customers relative to their cost.

connected
product The value of features or capabilities will vary by market

capabilities
segment, and so the election of features a company
Step 2 offers will depend on what segments it choose to serve!
and features
should the
company A company should incorporate those capabilities
pursue?
and features that reinforce its competitive
Step 3 positioning.

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Q2
How much
functionality Answer:
should be A company must decide whether the enabling technology
embedded for each feature should be embedded in the product
in the raising the cost of every product delivered through the
product and product cloud, or both.
how much in
the cloud?

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 An open system enables the end
Q3 Open
customer to assemble the parts
of the solution-both the products
Should the System involved and the platform that

company
ties the system together-from
different companies.
pursue an
open or
closed A closed system aims to have

system? Closed customers purchase the entire

smart. It creates competitive

System
advantage by allowing company
to control and optimize of
system.

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Q4
Should the
company
develop the Answer:
full set of It depend. A company must choose which layers of
smart, technology to develop and maintain in-house and
connected which to outsource to suppliers and partners.
product
capabilities
and
infrastructure?

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Q5 A company must consider:
What data
must the How does each type of data create tangible value for
company functionality?
capture, For efficiency in the value chain?

secure, and Will the data help the company understand and
improve how the broader product system is
analyse to performing over time?...
maximize the ALSO the product integrity, security or privacy risks
value of its for each type of data and the associated cost
offering?

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Q6
How does the
company The key is who actually owns the data.
manage
ownership
and access
rights to its
product data?

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Q7
Should the By minimizing the role of the middlemen,
company fully companies can potentially capture new
or partially revenue and boost margins. They can also
disintermedia improve their knowledge of customer needs,
strengthen brand awareness, and boost loyalty
te distribution by educating customers more directly about
channels or product value.
service
networks?

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Q8 It depends on
Should the The costs of servicing the product and other
company costs of use
change its The risks of downtime and other product
business failures and defects not covered by
warranties
model?

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Q9
Should the
company
enter new Only if it may lead to new services or new
businesses by business.
monetizing its
product data
through
selling it to
outside
parties?

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Q10
Should the Companies must identify a clear value
proposition before entering.
company
expand its
scope?

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 Smart, connected products enable four new categories of
capabilities that create breakthroughs in differentiation and
operational effectiveness, improve customer experience, and
enable new revenue streams.

Key Points
To capitalize, manufacturing firms must rethink nearly
everything they dofrom how products are designed, and
sourced, to how they are manufactured, sold and serviced,
to putting in place a whole new kind of IT infrastructure.

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Strategy and
The Internet
CUHK Business School
Greta Zhang

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