1 MD703 Strategy Concepts © Copyright , John M. Gallaugher, Ph.D

2 Lecture Topics Porter’s 5 Forces / ICA –McFarlan’s Five Questions Porter’s Value Chain Model Resource-based Theory –IS as resource & enabler Why Successful Firms Fail Killer Apps - Creating Market Disruption –Network Externalities - why Killer Apps are deadly

3 How Do We Know If An Asset Yields Sustainable Advantages? Rareness –Is the asset in limited supply or difficult to acquire? Value –Does the asset yield value to the firm/customers? Imperfectly Imitable –Is the asset impossible to imitate? Non-Substitutable –Is the asset without comparable substitutes?

4 SWOT Analysis Organizational Analysis Environmental Analysis Strengths Weaknesses Opportunities Threats

5 ICA: Industry & Competitive Analysis (Porter’s Five Forces) Industry Competitors Potential New Entrants Substitute products or services Power of Suppliers Power of Buyers

6 Threats from Competitors –Growth industry w/above average profits –Fragmented industry - no clear leader / national brand –Low startup costs –Lack of scale economies –Low differentiation –Weak brands / low customer loyalty –Low customer switching costs –Available distribution networks –Technology & Regulatory shifts –Similar products/services/industries exist

7 Addressing Competitive Threats –Economies of Scale –Product Differentiation –Advantages Independent of Scale prop. tech, learning curve/know-how, geography, raw mat. –Contrived Deterrence over-capacity, pre-announcements –Government Regulation of Entry –Switching Costs –Create / secure distribution channels –Preemptive Cannibalization –Alliances (with complementary firms & competitors)

8 Threat of Suppliers Small number of suppliers Suppliers sell highly differentiated products Suppliers not threatened by substitutes Firm is not an important customer for suppliers Suppliers threaten forward vertical integration Information asymmetries

9 Weaken Supplier Power / Add Value Foster relationships with more suppliers Acquire & leverage information Lower product complexity - turn supplier products into commodities –be less dependent on a given supplier Integrate backwards Tightly integrate suppliers into your operations –make suppliers more dependent on your firm

10 Commoditizing Products Commodities Differentiated Goods PRODUCT COMPLEXITY LOW HIGH Information Systems Examples Computer Aided Design (CAD) Computer Aided Engineering (CAE) Computer Aided Manufacturing (CAM) Integrated Robotics

11 Threat of Buyers Small number of buyers Buyers purchase commodity products Products sold to buyers consume a high portion of the product’s final cost Buyers are not earning significant economic profits Buyers threaten backward vertical integration Information asymmetries

12 Weaken Buyer Power / Add Value Seek or create new buyers / new markets Reduce buyer costs / assist buyer in expanding markets Differentiate products Acquire & leverage information Tightly integrate with buyers Integrate forwards

13 Differentiating Products Commodities Differentiated Goods LEVEL OF CUSTOMIZATION LOW HIGH Examples Customer-driven Ordering Systems Just In Time (JIT) Manufacturing Systems Information Systems

14 McFarlan’s Five Questions Can IS Build Barriers to Entry? Can IS Build in Switching Costs for Customers? Can IS Change the Basis of Competition? Can IS Change the Balance of Power in Supplier Relationships? Can IS Generate New Products?

15 Value Chain InboundOperationsOutboundMarketingService logisticslogistics& Sales Infrastructure: general mgmt, planning, finance, IS HRM: recruiting, hiring, training, and development Tech. Development: R&D Procurement

16 Inbound Logistics Expediting raw materials to production Where IT can help –automated warehousing –just-in-time (JIT) inventory (tightening supplier links) –ex. Wal-Mart

17 Operations Transforming inputs into finished products Where IT can help –flexible manufacturing systems –robotics –ex. GM & Boeing use of wearable PCs

18 Outbound Logistics Storing and distributing finished products Where IT can help –automated order processing –electronic bills of lading (tighter buyer links) –ex. Proctor & Gamble’s use of EDI (Electronic Data Interchange)

19 Marketing & Sales Promotion and sale of products Where IT can help –customer identification –standardizing the sales process –ex. Spiegel’s use of neural networks, Trilogy’s configuration support expert systems

20 Service Post-sale services to maintain and enhance products Where IT can help –need detection and remote servicing –automated dispatch of repair technicians –automated information distribution –ex. AmEx use of NN for fraud detection, software (bug fix) distribution over the Internet, OTIS/Xerox self-diagnostic systems

21 Firm Infrastructure Support of the entire value-chain. Includes general management, legal services, finance, IS, and public relations Where IT can help –decision support systems –management information systems

22 Human Resource Management Recruiting, hiring, and training development Where IT can help –automated training –automated personnel scheduling –ex. Mrs. Field’s hiring & development expert system

23 Technology Development Improving products and processes Where IT can help –Computer Aided Design (CAD) –Computer Aided Engineering (CAE) –Computer Aided Manufacturing (CAM) –Computer modeling (supercomputers) –ex. Drug modeling by pharmaceutical companies; Apple simulating PCs before chips are developed

24 Procurement Purchasing inputs supplies Where IT can help –online procurement systems –inventory locator systems –ex. GE TPN, SupplyWorks Open Buying Initiative

25 IS as a Resource Competitive advantage is sometimes achieved through multiple resources IS can be an enabler –enabling latent advantages in an organization that are not effectively utilized (e.g. a certain world-leading metals mfg.) IS can create new resources –reshaping market dynamics (OTIS) –over time (e.g. databases)

26 IS as an Enabler IS resource yields competitive advantage –(ex. a certain world-leading metals firm) Competitive Advantage World-leading mfg. & sales Integrated IS across plants / offices

27 Creating / Enhancing Resources Created when resources combine for additional benefit. –ex. OTISLINE, GE Aircraft Engines Competitive Advantage Service Network OTISLINE System R & D Exceptional Service Superior Products

28 Time-Based Resources Resources may yield additional advantages/ opportunities over time –ex. American Express Competitive Advantage Customer Database Growth Over Time

29 HyperCompetition Profits from a competitive advantage launch exploitation counter-attack Profits from a competitive advantage

30 Product Performance Time Performance demanded at the high end of the market Performance demanded at the low end of the market Progress due to sustaining technologies Disruptive technological innovation Progress due to sustaining technologies Existing profit, staffing, and customer pressures stall innovation Traditional market & financial analysis cause blindness Why Do Leaders Fail?

31 Creating the Killer-App Blindness & Pressures –existing customers & market pressure –financial performance measures Managing a Portfolio of Innovations –gather intelligence from technologists, academics, VCs, and non-traditional sources –place responsibility for development with independent organizations

32 Network Externalities (a.k.a. Metcalfe’s Law) A product or service becomes more valuable as it’s installed base expands Why do consumers care about installed base? –Exchange opportunities –Stability –Extrinsic, complementary benefits More Exchange Opportunities More Members

33 Why are Markets for Network Goods Different? Market competition occurs very early and is particularly fierce Markets are ‘tippy’ and subject to bandwagons Markets exhibit monopolistic tendencies The ‘best’ technology or highest quality product doesn’t always win