The Danger of Relying on Technology Firms strive for sustainable competitive advantage, financial performance that consistently outperforms industry averages Achieving sustainable competitive advantage is not easy Rapid emergence of new products and new competitors New competitors and copycat products cutting costs, prices and increasing features that may benefit customers but erode profits industry-wide

The Danger of Relying on Technology Achieving sustainable competitive advantage is more difficult when competition involves technology The fundamental strategic question in the Internet era: “How can I possibly compete when everyone can copy my technology and the competition is just a click away?”

The Danger of Relying on Technology Two concepts defined by Michael Porter can be useful in achieving sustainable advantage Value chain Five forces According to Porter, firms suffer aggressive, margin-eroding competition because they define themselves according to operational effectiveness rather than strategic positioning

The Danger of Relying on Technology Operational effectiveness: Performing the same tasks better than rivals perform them The danger in operational effectiveness is “sameness” This risk is acute in firms that rely on technology for competitiveness Buy the same stuff as your rivals Hire students from the same schools Copy the look and feel of competitor Web sites Reverse engineer their products

The Danger of Relying on Technology Fast follower problem: Exists when savvy rivals watch a pioneer’s efforts, learn from their successes and missteps, then enter the market quickly with a comparable or superior product at a lower cost before the first mover can dominate Technology can be matched quickly — Rarely a source of competitive advantage

The Danger of Relying on Technology Operational effectiveness is critical, but not sufficient enough to yield sustainable dominance over the competition Strategic positioning: Performing different activities from those of rivals, or the same activities in a different way Technology itself is often very easy to replicate, but it is essential to creating and enabling novel business approaches that are defensibly different and can be quite difficult for others to copy

FreshDirect Redefines the NYC Grocery Landscape The New York City–based grocery firm focused on the two most pressing problems for Big Apple shoppers: Selection is limited Prices are high The solution it provides Use technology to craft an ultraefficient model that makes an end-run around stores

FreshDirect Redefines the NYC Grocery Landscape The FreshDirect model crushes costs that plague traditional grocers Worker shifts are highly efficient The firm buys and prepares what it sells, leading to less waste Higher inventory turns Use of artificial intelligence software Use of climate controlled cold rooms to save energy Use of recycled bio-diesel fuel to cut down on delivery costs

FreshDirect Redefines the NYC Grocery Landscape The firm offers suppliers several benefits beyond traditional grocers, in exchange for more favorable terms such as: Offering to carry a greater selection of supplier products by eliminating “slotting fees” Co-branding products Paying in days rather than in weeks Sharing data to improve supplier sales and operations

Resource-based view of competitive advantage How can you recognize whether your firm’s differences are special enough to yield sustainable competitive advantage? 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 Valuable Rare Imperfectly imitable Nonsubstitutable

Powerful Resources Being aware of major sources of competitive advantage can help managers: Recognize an organization’s opportunities and vulnerabilities Brainstorm winning strategies Often a firm with an effective strategic position can create an arsenal of assets that: Reinforce one-another Create advantages that are difficult for rivals to successfully challenge

Powerful Resources: Imitation-Resistant Value Chains Imitation-resistant value chains: A way of doing business that competitors struggle to replicate and that frequently involves technology in a key enabling role Value chain: Set of interrelated activities that bring products or services to market

Powerful Resources: Imitation-Resistant Value Chains FreshDirect The elements in FreshDirect’s value chain work together to create and reinforce competitive advantages that others cannot easily copy Incumbents would be straddled between two business models, unable to reap the full advantages of either Straddling: When a firm attempts to match the benefits of a successful position while maintaining its existing position Late-moving pure-play rivals will struggle, as FreshDirect’s lead time allows it to develop brand, scale, data, and other advantages that newcomers lack

The Value Chain

Key Framework: The Value Chain When a firm has an imitation-resistant value chain, it may have a critical competitive asset From a strategic perspective, managers can use the value chain framework to consider a firm’s differences and distinctiveness compared to rivals An analysis of a firm’s value chain can reveal operational weaknesses Technology is of great benefit to improving the speed and quality of execution

Key Framework: The Value Chain Firms can buy software and tools Supply chain management (SCM) Customer relationship management (CRM) Enterprise resource planning software (ERP) Potential danger If a firm adopts software that changes a unique process into a generic one, it may have co-opted a key source of competitive advantage particularly if other firms can buy the same stuff Can be purchased by competitors too

Key Framework: The Value Chain Dell stopped deployment of the logistics and manufacturing modules of a packaged ERP implementation — It realized that the software would require the firm to make changes to its unique and highly successful operating model Apple adopted third-party ERP software because the firm competes on product uniqueness rather than operational differences

Powerful Resources: Brand Brand: The symbolic embodiment of all the information connected with a product or service A strong brand can be an exceptionally powerful resource for competitive advantage Consumers use brands to lower search costs How do you build a strong brand? A strong brand proxies quality and inspires trust Technology can play a critical role in rapidly and cost-effectively strengthening a brand

Powerful Resources: Brand Viral marketing: Leveraging consumers to promote a product or service Branding is difficult, but if done well, even complex tech products can establish themselves as killer brands Early customer accolades for a novel service often mean that positive press will also likely follow Showing up late may mean paying much more to gain attention

Powerful Resources: Scale Scale advantages: Advantages related to a firm’s size Businesses benefit from economies of scale Economies of scale: When the cost of an investment can be spread across increasing units of production or in serving a growing customer base A growing firm may gain bargaining power with its suppliers or buyers 2-20

Powerful Resources: Switching costs and Data Switching costs: Exist when consumers incur an expense to move from one product or service to another Sources of switching costs: Learning costs Information and data Financial commitment Contractual commitments Search costs Loyalty programs Data can be a particularly strong switching cost for firms leveraging technology

Powerful Resources Differentiation Commodities are products or services that are nearly identically offered from multiple vendors To break the commodity trap, many firms leverage technology to differentiate their goods and services Network effects: When the value of a product or service increases as its number of users expands Distribution channels: The path through which products or services get to customers

Powerful Resources: Patents Intellectual property protection can be granted in the form of a patent for those innovations deemed to be useful, novel, and nonobvious Firms that receive patents have some degree of protection from copycats that try to identically mimic their products and methods Patents are not necessarily a sure-fire path to exploiting an innovation.

Barriers to Entry, Technology, and Timing The barriers to entry for many tech-centric businesses are low Market entry is not the same as building a sustainable business and just showing up doesn’t guarantee survival Timing and technology alone will not yield sustainable competitive advantage — Both can be enablers for competitive advantage Moving first pays off when the time lead is used to create critical resources that are valuable, rare, tough to imitate, and lack substitutes

Figure 2.6 - The Five Forces of Industry Competitive Analysis

Key Framework: The Five Forces of Industry Competitive Advantage In markets where commodity products are sold, the Internet can increase buyer power by increasing price transparency The more differentiated and valuable an offering, the more the Internet shifts bargaining power to sellers Price transparency: The degree to which complete information is available Information asymmetry: A decision situation where one party has more or better information than its counterparty

Competitive Environment: Porter’s Forces Model Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Customers Rivalries within Industry Threat of Substitutes 3 3

Competitive Environment: Porter’s Forces Model Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Customers Rivalries within Industry Threat of Substitutes Regulatory 4 4

Strategy Case Study: Zara Zara: Game-changing clothes giant Parent company: Inditex Corporation The blend of technology-enabled strategy unlashed by Zara seems to break all of the rules in the fashion industry The firm shuns advertising and rarely runs sales In fashion industry nearly every major player outsources manufacturing to low-cost countries, but Zara is highly vertically integrated, keeping huge swaths of its production process in-house

Table 3.1 - Gap versus Inditex at a Glance

Why Study Zara? To understand and appreciate : The counterintuitive and successful strategy of Zara The technology, which has made all of this possible

Gap: An Icon in Crisis Micky Drexler, the iconic CEO, helped turn Gap’s button- down shirts and khakis into America’s business casual uniform Drexler’s team had spot-on tastes throughout the 1990s When sales declined in the early 2000s, Drexler tried to revitalize the brand by filling the stores with teenage apparels This shift sent Gap’s mainstay customers to retailers that easily copied the styles that Gap had made classic

Gap: An Icon in Crisis Gap’s same-store sales declined for twenty-nine months straight, profits vanished Paul Pressler, the new CEO shut down hundreds of stores, but it did not help due to bad bets on colors and styles The marketing model used by Gap to draw customers in via big-budget television promotion had collapsed In January 2007, Pressler resigned

Contract Manufacturing: Lower Costs at What Cost? Conventional wisdom suggests that leveraging cheap contract manufacturing in developing countries can keep the cost of goods low Contract manufacturing: Involves outsourcing production to third-party firms Firms that use contract manufacturers don’t own the plants or directly employ the workers who produce the requested goods Firms can lower prices and sell more product or maintain higher profit margins

Contract Manufacturing: Lower Costs at What Cost? The downside of contract manufacturing In order to have the low-cost bid, contract firms: Skimp on safety Ignore environmental concerns Employ child labor Engage in some ghastly practices

Contract Manufacturing: Lower Costs at What Cost? Firms that fail to adequately ensure their products are made under acceptable labor conditions risk a brand-damaging backlash that may: Turn off customers Repel new hires Leave current staff feeling betrayed

Don’t Guess, Gather Data To make sure that the stores carry the kinds of products customers want, Zara managers ask the customers Zara’s store managers are armed with personal digital assistants (PDAs) that can be used to: Gather customer input Chat up with customers to gain feedback on what they’d like to see more of Incentives for success—as much as 70 percent of salaries can come from commissions

Don’t Guess, Gather Data Staff also checks for customer preferences by looking at unsold items PDAs are linked to the store’s point-of-sale (POS) system Point-of-sale (POS) system: A transaction process that captures customer purchase information, showing how garments rank by sales Managers can send updates that combine the hard data captured at the cash register with insights on what customers would like to see

Don’t Guess, Gather Data All of this valuable data allows the firm to plan styles and issue rebuy orders based on feedback rather than hunches and guesswork The goal is to improve the frequency and quality of decisions made by the design and planning teams

Design Zara designs follow evidence of customer demand Zara design staff consists of young and fresh designers from design school Teams are regularly rotated to: Cross-pollinate experience Encourage innovation

Manufacturing and Logistics The average time for a Zara concept to go from idea to appearance in store is fifteen days versus their rivals who receive new styles once or twice a season The firm is able to be so responsive through: A competitor-crushing combination of vertical integration and technology-orchestrated coordination of suppliers Just-in-time manufacturing Finely tuned logistics

Manufacturing and Logistics Vertical integration: When a single firm owns several layers in its value chain Value chain: The set of interdependent activities that bring a product or service to market Nearly 60 percent of Zara’s merchandise is produced in-house, with an eye on leveraging technology in areas that: Speed up complex tasks Lower cycle time Reduce error

Manufacturing and Logistics Inventory optimization models ensure that each store is stocked with just what it needs Zara leverages contract manufacturers to produce staple items with longer shelf lives, which account for only about one-eighth of dollar volume

Manufacturing and Logistics Ceiling-mounted racks and customized sorting machines patterned on equipment used by overnight parcel services and Toyota-designed logistics, whisk items from factories to staging areas for each store Clothes are ironed in advance and packed on hangers, with security and price tags affixed Trucks serve destinations that can be reached overnight, while chartered cargo flights serve farther destinations within forty-eight hours Zara is also a pioneer in going green Introduction of biodiesel for the firm’s trucking fleet

Stores Running out of bestsellers at Zara delivers several benefits: Allows the firm to cultivate the exclusivity of its offerings Encourage customers to buy right away and at full price Encourages customers to visit often Reduces the rate of failed product introductions

Technology ≠ Systems. Just Ask Prada Zara’s IT expenditure is less than one-fourth the fashion industry average Zara excels by targeting technology investment at the points in its value chain where it will have the most significant impact Zara makes sure that every dollar spent on tech has a payoff

Technology ≠ Systems. Just Ask Prada The Prada example offers critical lessons for managers: Getting the right mix of the following five components is critical to executing a flawless information system rollout: Hardware Software Data Procedures People Financial considerations should forecast the return on investment (ROI) of any effort Designers need to thoroughly test the system before deployment

Moving Forward Zara’s value chain is difficult to copy, but it still has challenges to face Limitations of Zara’s Spain-centric, just-in-time manufacturing model: If problems occur in northern Spain, Zara has no other fall back The firm is potentially more susceptible to financial vulnerabilities as the Euro has strengthened relative to the dollar Rising transportation costs Zara’s financial performance can also be impacted by broader economic conditions

Moving Forward Zara’s value chain is difficult to copy; but it is not invulnerable, nor is future dominance guaranteed Zara’s management must Have an understanding of how information systems can enable winning strategies Scan the state of the market and the state of the art in technology, looking for new opportunities and remaining aware of impending threats

VC: Netflix When Netflix went public, financial disclosure rules forced the firm to reveal how profitable it was Rivals such as Blockbuster and Wal-Mart showed up Competitors underestimated Netflix because: It was an Internet pure play without a storefront It’s overall customer base was microscopic in comparison

VC: Netflix Newcomers mimicked Netflix with cheaper rival efforts forcing Netflix to cut prices Netflix survived big competitors, a price war, and spending on the rise

Why Study Netflix? It gives us a chance to examine how technology helps firms craft and reinforce a competitive advantage

How Netflix Works

How Netflix Works Netflix settled on a DVD-by-mail service model It charges a flat-rate monthly subscription Customers don’t pay mailing expenses and late fees Videos arrive in Mylar envelopes containing: Prepaid postage Return address After watching the video, consumers: Slip the DVD back into the envelope Drop the disc in the mail

How Netflix Works Users make their video choices in their “request queue” at Netflix.com Consumers use the Web site to: Rate videos Specify movie preferences Get video recommendations Check out DVD details Share their viewing habits and review

Tech and Timing: Creating Killer Assets Building a great brand online starts with offering exceptional value Advertising builds awareness, but brands are built through customer experience Subscribers expectations from Netflix: Huge selection Ability to find what they want Timely arrival Ease of use and convenience Fair price Technology drives all of these capabilities Technology is at the center of the firm’s brand building efforts

Tech and Timing: Creating Killer Assets Building a great brand online starts with offering exceptional value Advertising builds awareness, but brands are built through customer experience Subscribers expectations from Netflix: Huge selection Ability to find what they want Timely arrival Ease of use and convenience Fair price Technology drives all of these capabilities Technology is at the center of the firm’s brand building efforts

Selection: The Long Tail in Action Netflix offers its customers a selection of over 100,000 DVD titles Traditional retailers cannot offer this because of shelf space constraints Traditional retailers can determine their breakeven point by considering: Number of customers that can reach a location Store size Store inventory Payback from inventory Cost to own and operate the store

Selection: The Long Tail in Action Internet firms can have just a few highly automated warehouses Long tail: A phenomenon whereby firms can make money by offering a near-limitless selection

Figure 4.2 - The Long Tail

Selection: The Long Tail in Action The long tail works because: Cost of production and distribution drop It gives the firm a selection advantage that traditional stores cannot match Geographic constraints go away and untapped markets open up

Selection: The Long Tail in Action Netflix has used the long tail to create close ties with film studios Studios earn a percentage of the subscription revenue Netflix gets DVDs at a very low cost Studios do not spend on additional marketing

Cinematch: Technology Creates a Data Asset that Delivers Profits Netflix uses a proprietary recommendation system called Cinematch Each time a DVD is returned, Cinematch asks the customer to rate it Collaborative filtering: A classification of software that monitors trends among customers and uses this data to personalize an individual customer’s experience It can be mimicked by competitors

Cinematch: Technology Creates a Data Asset that Delivers Profits The data provided by Cinematch is a switching cost To see how strong switching costs are is to examine Netflix’s churn rate Churn rate: The rate at which customers leave a product or service In mid-2008, churn rates for Netflix’s most active regions were below 3 percent Netflix’s marketing costs benefit from satisfied customers, as referrals are a better choice than advertisements Netflix launched a crowdsourcing effort known as The Netflix Prize

A Look at Operations Technology lies at the heart of Netflix’s warehouse operations Netflix has a network of fifty-eight ultrahigh-tech distribution centers Distribution centers are all located close to U.S.P.S. facilities Trucks collect DVD shipments from these U.S.P.S. hubs and return the DVDs to the nearest Netflix center Scanners pick out incoming titles Netflix presorts outgoing mail before dropping it off at the U.S.P.S. facilities All DVDs are hand-inspected for cracks and smudges Warehouse processes are linked to Cinematch

A Look at Operations Staff members are expected to focus on improving the firm’s processes Quality management features are built into systems Netflix can monitor and record the circumstances surrounding any failures

Killer Asset Recap: Understanding Scale Netflix’s size gives it a huge scale advantage Scale economies allow firms to: Lower prices Spend more on customer acquisition, new features, or other efforts Smaller rivals have an uphill fight Established firms end up straddling markets

Killer Asset Recap: Understanding Scale Netflix’s size gives it a huge scale advantage Scale economies allow firms to: Lower prices Spend more on customer acquisition, new features, or other efforts Smaller rivals have an uphill fight Established firms end up straddling markets

From Atoms to Bits: Opportunity or Threat? Many media products are created as bits (digital files) When we buy a CD, DVD, book or newspaper, we’re buying physical atoms that are a container for the bits

Access to Content When Netflix launched its streaming video option, only 17,000 videos were offered Legal issues involved in securing the digital distribution rights Windowing restricts the number of titles available Wal-Mart uses its bargaining power to encourage studios to: Hold content from competing windows Limit offering titles at competitive pricing during the new release period

But how does it Get to the TV? Netflix initially developed a prototype set top box It then developed a software platform that allowed firms to build Netflix access into their devices Advantages of the atoms to bits model Netflix will eliminate a huge chunk of its shipping and handling costs Bandwidth costs are minimal

But how does it Get to the TV? Disadvantages of the atoms to bits model Wrangling licensing costs is a challenge The switch to Blu-ray DVDs means that Netflix will be forced to carry two sets of video inventory Standard High-definition