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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 industrys 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.
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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 organizations 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, 1993-2012

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Entry threat/
Entry barriers

Emerging
technologies

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Apples 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, 1993-2012

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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

Zaras 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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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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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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Value Chain

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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
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Stan Shih Smile Curve

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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, 1993-2012

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Activity

Zaras 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 dont 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. Zaras IT staff works with vendor to
develop automated conveyor to support distribution activities.
Vertical integration reduces amount of purchasing needed.

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An Example of Detail Value Chain Activities

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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.


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Industrial Value Chain

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Industry Value Chain

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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?

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Integration

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