MBA 703 Ch2: Strategy & Technology (PDF)

CHAPTER 2 Strategy & Technology Chapter 2.1 Learning Objectives Define operational effectiveness and understand the limitations of technology-based competition leveraging this principle. Define strategic positioning and the importance of grounding competitive advantage in this conc...

CHAPTER 2 Strategy & Technology Chapter 2.1 Learning Objectives Define operational effectiveness and understand the limitations of technology-based competition leveraging this principle. Define strategic positioning and the importance of grounding competitive advantage in this concept. Understand the resource-based view of competitive advantage. List the four characteristics of a resource that might possibly yield sustainable competitive advantage. The danger of relying on technology ▪ Firms strive for sustainable competitive advantage. □ Sustainable competitive advantage: Financial performance that consistently outperforms industry averages. □ Difficult to achieve due to the rapid emergence of new products and new competitors. ▪ Competitors cut costs, cut prices, and increase features in order to achieve comparative advantage.  The danger of relying on technology (Cont.) ▪ Michael Porter’s concepts are useful for firms attempting to achieve comparative advantage: □ Value chain □ Five forces Professor Michael Porter, Harvard Business School ▪ Porter states that firms defining themselves according to operational effectiveness suffer aggressive, margin- eroding competition. □ Operational effectiveness: Performing the same tasks better than rivals. □ The danger lies in similarity and failure to innovate. When offerings are roughly the same, they are more commodity. The danger of relying on technology (Cont.) Fast follower problem exists when competitors: □ Watch a pioneer’s efforts. □ Learn from their successes and missteps. □ Enter the market quickly with a comparable or superior product at a lower cost before the first mover can dominate. □ Because technology can be matched quickly, firms that pioneer in technology are especially susceptible to this problem. The danger of relying on technology (Cont.) Fast follower problem: Example of Snapchat vs. Facebook Instagram, WhatsApp, Messenger, and the flagship Facebook app routinely mimic Snap features, implementing some in as little as four months after their appearance in Snapchat, leading TechCrunch to quip Facebook’s development mantra, formerly “Move Fast and Break Things” should now be “Move Last and Take Things.” Technology and Strategic Positioning ▪ Strategic positioning: Performing different activities than rivals, or the same activities in a different way. □ Technology should create and enable novel business approaches that are defensibly different and can be difficult for others to copy. Technology and strategic positioning Strategic positioning ▪ The FreshDirect model: □ Provides innovations such as: ▫ Worker shifts are highly efficient. ▫ Firm buys and prepares its own goods. ▫ Higher inventory turns (number of times inventory is sold or used during a given period). ▫ Use of artificial intelligence and climate- controlled rooms. □ In exchange, they receive more favorable supplier terms with stores: ▫ Sharing data to improve supplier sales and operations ▫ Paying in days rather than in weeks  Resourced-based view of competitive advantage ▪ To maintain sustainable competitive advantage, a firm must control a set of exploitable resources that has four critical characteristics: I. Valuable II. Rare III. Imperfectly imitable IV. Non-substitutable ▪ Resource-based thinking helps to avoid entering markets simply because growth is spotted. What would be the source of competitiveness? Sustainable; non-imitable (unique) advantage Such firms have access to special/unique resources or they use commonly available resource more efficiently. What is the source of competitive advantage? Chapter 2.2 Learning objectives Understand that technology is often critical to enabling competitive advantage. Understand the value chain concept. Recognize the role technology can play in crafting an imitation-resistant value chain. Understand and provide examples of how technology can be used to create or strengthen the resources mentioned above. Powerful resources Being aware of major sources Recognize an organization’s opportunities and of competitive advantage can vulnerabilities. help managers: Brainstorm winning strategies. Firms with an effective strategic Creates advantages that are difficult for rivals position can create assets that reinforce one another. to successfully challenge.  Imitation-resistant value chains A way of doing business that competitors struggle to replicate and that involves technology in a key enabling role Value chain: Set of activities through which a product or service is created and delivered to customers. For example, elements in FreshDirect’s value chain work together to create and reinforce competitive advantages that others cannot easily copy. Imitation-resistant value chains ▪ Incumbents would be straddled between two business models, unable to reap full advantages of either. □ Straddling: Attempts to occupy more than one position, while failing to match the benefits of a more efficient, singularly focused rival. ▪ Late-moving rivals will struggle. ▪ As FreshDirect’s lead time allows it to develop brand, scale, data, and other advantages that newcomers lack. How does your organization create value? Value: the amount of money that a customer is willing to pay Value is at the heart of every business. The value that's created and captured by a company is the profit margin: Value Created and Captured –(minus) Cost of Creating that Value = Margin Understanding the ways your company creates value: critical to stay competitive Value Chain Model VALUE CHAIN is a set of value-creating activities. Porter identifies a chain of activities common to all business and divided into two groups: 1. Primary Activities (5 generic categories) 2. Support Activities (4 generic categories) Developed to examine activities of a business: □ Where a business can add value or reduce cost, or both? Value Chain Model Value Chain Model: A short video  Value Chain Model Primary Activities (5 generic categories)  Example: 1. Inbound logistics — premium coffee beans… □ Starbucks selects the finest beans and handles transportation, and storage of them 2. Operations — Starbucks is everywhere… □ Starbucks offers services around the world, ensuring they build a strong consumer base and keep their name well-known. 3. Outbound logistics — Barely selling in retails… □ Starbucks has only recently started to sell some of their products outside their licensed shops.  Example: 4. Sales/marketing — the quality is loud… □ Starbucks relies heavily on quality rather than aggressive marketing tactics 5. Service — building relationships… □ Starbucks aims at building customer loyalty through high level of customer service. Value Chain Model Support Activities Descriptions General Management, Accounting, Legal, Firm Finance (i.e., the functions that allow delivery of Infrastructure daily operations) Human resource Hiring, Training, Retention, Rewards management Improving products and the production Technology process, Minimizing IT costs, Staying Current Development with new ITs Purchasing input, finding vendors and Procurement negotiating best prices  Example: 1. Infrastructure — Strong resources… □ Well-design stores, excellent leadership, efficient finance, accounting, and legal department 2. Human Resource Management — Key attribute… □ Greate benefits, motivated workforce, traingng programs, low turnover rates  Example: 3. Technology Development — Investments in innovative technologies… □ To ensure consistency in taste and quality; to connect to customers 4. Procurement — Best beans from partners… □ Established strategic links with qualified suppliers Importance of Value Chain Model If your goal is to achieve operational excellence, where do you start? □ Value Chain Model ▫ The activities in the business ▫ Identifies critical activities Benchmarking □ Comparing your own organization, operations, or processes against other organizations’ (best practices) Role of IS in Value Chain A firm’s value chain reveals weaknesses in business processes: ▪ IS can be applied to deal with them □ to improve the speed, □ quality, □ Lower costs of executions/functions □ and to connect to customers & suppliers  Improved profit margins & competitive advantage IS in Value Chain Software tools such as: ▪ Supply Chain Management (SCM: linking inbound and outbound logistics with operations), ▪ Customer Relationship Management (CRM: automate sales & marketing) ▪ Enterprise Resource Planning software (ERP: software implemented in modules to automate the entire value chain)  Q: Since rivals can also buy these systems does adopting them automatically lead to competitive advantages? Example: Dell: ERP changes a unique process into a generic one! Q: Is it a good change?! Supply Chain Management The Supply Chain Supply Chain: § the flow of materials, information, and services from raw material suppliers, through factories and warehouses, to the end customers. § Network of organizations and processes for: § Procuring raw materials § Transforming them into products § Distributing the products The Supply Chain The Supply Chain The supply chain can be divided into three distinct groups: 1.Upstream supply chain: Firm’s suppliers, suppliers’ suppliers, processes for managing relationships with them 2.Downstream supply chain: Organizations and processes responsible for delivering products to customers 3.Internal supply chain The employees that transform materials, components, and services into the actual products.  Generic Supply Chain Generic Supply Chain Nike’s Supply Chain The Advantages of Buying Direct (FreshDirect examp IS and Supply Chain Management IS is the glue that hold the supply chain (SC) together. Inefficiencies in SC increase a company's operating costs E.g., parts shortages, underused plant capacity, excessive finished goods inventory. Can waste up to 25% of operating expenses Just-in-time strategy: Components arrive as they are needed Finished goods shipped after leaving assembly line (no warehousing). Supply Chain Management Safety stock To cope with uncertainties: e.g., changing demands or defective parts/raw materials Buffer for lack of flexibility in supply chain Supply Chain Management Bullwhip effect ▪ Information about product demand gets distorted as it passes from one entity to the next across the supply chain ▪ A slight rise in demand for an item (i.e., a small change) leads to excessive inventory, production, warehousing, ‘Just in Case’. ▪ Timely and accurate information sharing among across the SC can prevent the Bullwhip effect. ▪ Some firms do not want to give up information, though.  The Bullwhip Effect Inaccurate information can cause minor fluctuations in demand for a product to be amplified as one moves further back in the supply chain. Figure 9-3 Supply Chain Management (SCM) Software Supply chain planning systems: manage flow of information up & down the chain. Such as: Generate demand forecasts. Share information about changes easier and faster so work can be better coordinated. Develop better demand planning that matches production closer with customer demands. Manage the flow of products through distribution centers and warehouses by using supply chain execution systems. Coordinate activities with supply chain partners.  Global Supply Chain: Many pieces – from across the United States, Europe, Asia and Australia – with one grand result: a Boeing 787” Global Supply Chain Global Supply Chains and the Internet Global SC: Use of web-based apps to transfer information across SC. § A manager uses a web interface to tap into suppliers’ systems to determine whether inventory and production capabilities match demand for the firm’s products. Global Supply Chains and the Internet Some of the issues of global SC:  Greater geographical distances  Greater time differences  Participants from different countries  Different performance standards  Different legal requirements Internet helps companies manage global complexities  Outsourcing operations: e.g., manufacturing and logistics  Apparel industry: Li & Fang ; China  Third party Logistics: e.g.,UPS Demand-Driven Supply Chains In addition to reducing costs, SCM systems facilitate efficient customer response: § Enabling the business to be driven more by customer demand. 2 SC Models 1. Push-based model (build-to-stock) § Schedules based on best guesses of demand 2. Pull-based model (demand-driven) § Customer orders trigger events in the supply chain § E.g., Dell does not build a computer until it receives an order.  Push- Versus Pull-Based Supply Chain Models The difference between push- and pull-based models is summarized by the slogan “Make what we sell, not sell what we make.” Pros and Cons of Pull-based SC ▪ Pros of Pull-based Model □ higher service levels: customer-centered □ decreased inventory levels ▪ But, may take longer to fulfill an order and can be costly ▪ Most businesses are using a hybrid approach: □ a push-based system to get the products to regional warehouse □ From there they wait for orders that pull products in near retailers 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 decide which company’s products are better, thus forming brand loyalty. Technology helps in rapidly and cost-effectively strengthening a brand. Viral marketing: Leveraging the enthusiasm of consumers to promote a product or service Scale advantages ADVANTAGES RELATED TO A FIRM’S SIZE ▪ Businesses benefit from economies of scale: Costs can be spread across increasing units of production or in serving multiple customers. ▪ Organizations are scalable if they benefit from scale economies as they develop. ▪ Developing firms may gain bargaining power with their suppliers or buyers. Switching cost Costs incurred by consumers when switching from one product to another. Q: Can switching cost be a non-monetary cost?? Firms that seem dominant but that do not have high switching costs can be rapidly outshined by strong rivals. Sources of Switching Costs: Learning costs Information and data Financial commitment Contractual commitments Search costs Loyalty programs Value of Service and Switching Costs To win customers from an established incumbent, a late-entering rival must offer a product or service that not only exceeds the value offered by the incumbent, but also exceeds the incumbent’s value and any customer switching costs.  Differentiation ▪ Technology is used by firms to differentiate their wares. □ Data plays a critical role in differentiation. □ Commodities: products or services that are nearly identically offered from multiple vendors (e.g., gold, wheat). Network effects ▪ When the value of a product or service increases as its number of users expands. □ Referred to as network externalities or Metcalfe’s Law. ▪ Switching costs play a role in determining the strength of network effects. ▪ Strong asset for firms that can control and leverage a leading standard. OpenTable: Network Effects That Fill Restaurants’ Seats ▪ Network effects are at the center of OpenTable’s dominance in restaurant reservations. ▪ OpenTable has built the world’s largest online restaurant reservation system. ▪ Customers are attracted to the service that has the most restaurants, and restaurants are attracted to the service with the most customers. Strategists call this a two-sided market. Distribution channels The path through which products or services get to customers, distribution Rank Firm Sales/ Sq. channels, can be critical to a firm’s Ft. success. 1 Apple Stores $6,050 Through networked technology, users 2 Murphy USA $3,970 3 Tiffany & Co $3,017 can be recruited to create new distribution channels. 4 Lululemon Athletica $1,936 5 Coach $1,871 Affiliates: Third parties that promote a Top Retailers by Sales per Square Foot (2023/24) product or service in exchange for a cut of any sales. Distribution channels (Cont.) Technology also opens up opportunities to leverage products provided by others to create new distribution channels to reach customers. Such as: APIs (application programming interfaces): Programming hooks, or guidelines, published by firms that tell other programs how to get a service to perform a task such as send or receive data. Amazon provides APIs to let developers write their own applications and websites that can send the firm orders. By publishing APIs, Uber has managed to add its service to apps and websites provided by United Airlines, OpenTable, and TripAdvisor.  Patents Grant protection for intellectual properties; applicable to innovations deemed to be useful, novel, and nonobvious Patents provide firms a degree of protection from copycats. Cut off paths to exploit an innovation. Considered to be unfairly stacked against start-ups. Chapter 2.3 Learning objectives Understand the relationship between timing, technology, and the creation of resources for competitive advantage. Argue effectively when faced with broad generalizations about the importance (or lack of importance) of technology and timing to competitive advantage. Recognize the difference between low barriers to entry and the prospects for the sustainability of new entrants’ efforts. Barriers to entry, technology, and timing ▪ Barriers to entry for many tech-centric businesses are low. ▪ Market entry does not necessarily result in building a sustainable business. □ 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. Chapter 2.4 Learning objective ▪ Diagram the five forces of competitive advantage. ▪ Apply the framework to an industry, assessing the competitive landscape and the role of technology in influencing the relative power of buyers, suppliers, competitors, and alternatives. Porter's Competitive Forces Model Porter's Competitive Forces Model Porter's Five Forces is a framework for analyzing a company's competitive environment: 1. Traditional competitors/rivals Competitors in market space continuously devise new products, new efficiencies, switching costs. 2. New market entrants Some industries have low barriers to entry: E.g., food industry versus microchip industry Newer companies may have advantages: Newer equipment, younger workforce, and so on. Porter's Competitive Forces Model (Cont.) 3. Substitute products and services Substitutes customers can purchase if your prices too high. E.g., Internet music service vs. CDs; WhatsApp vs. Telephone; Wind vs. Coal; Electric power vs. Gas 4. Customers Can customers easily switch to competitor's products? Can customers force firm and competitors to compete on price? (esp., where there is no differentiation) 5. Suppliers The more suppliers a firm has, the greater control it can exercise over suppliers. Substitute Products: ChatGPT Is Impacting Stack Overflow Generative AI as a Substitute Good ▪ Generative AI (GenAI): Technology like ChatGPT generates answers for users, providing a direct alternative to traditional search engines and Q&A sites. Impact on Search Engines and Niche Sites: ▪ Potential Threat: GenAI could disrupt the lucrative Internet search advertising market. ▪ Current Observations: While GenAI hasn’t significantly impacted Google’s search market share, niche sites like Stack Overflow have seen a sharp decline. Information System Strategies for Dealing with Competitive Forces Basic strategy: Technology serves the business, NOT the other way around (What does it mean? See below) Align IT with business objectives  75% of businesses fail to align their IT with their business objectives, leading to lower profitability. Why?  To align IT: ▻ Identify business goals and strategies. ▻ Break strategic goals into concrete activities and processes. ▻ Identify metrics for measuring progress. ▻ Determine how IT can help achieve business goals. ▻ Measure actual performance.