Competitive Strategy PDF

A competitive strategy is a statement that identifies a business’s approach to compete, its goals, and the plans and policies that will be required to carry out those goals (Porter, 1985).1 A strategy, in general, can apply to a desired outcome, such as gaining market share. A competitive strategy f...

A competitive strategy is a statement that identifies a business’s approach to compete, its goals, and the plans and policies that will be required to carry out those goals (Porter, 1985).1 A strategy, in general, can apply to a desired outcome, such as gaining market share. A competitive strategy focuses on achieving a desired outcome when competitors want to prevent you from reaching your goal. Therefore, when you create a competitive strategy, you must plan your own moves, but you must also anticipate and counter your competitors’ moves.Through its competitive strategy, an organization seeks a competitive advantage in an industry. That is, it seeks to outperform its competitors on a critical measure such as cost, quality, and time-to-market. Competitive advantage helps a company function profitably within a market and generate higher-than-average profits.Competitive advantage is increasingly important in today’s business environment, as you will note throughout the text. In general, companies’ core business has remained the same. That is, information technologies simply offer tools that can enhance an organization’s success through its traditional sources of competitive advantage, such as low cost, excellent customer service, and superior supply chain management. Strategic information systems (SISs) provide a competitive advantage by helping an organization to implement its strategic goals and improve its performance and productivity. Any information system that helps an organization either achieve a competitive advantage or reduce a competitive disadvantage qualifies as a strategic information system.Porter’s Competitive Forces ModelThe best-known framework for analyzing competitiveness is Michael Porter’s competitive forces model (Porter, 1985). Companies use Porter’s model to develop strategies to increase their competitive edge. The model also demonstrates how IT can make a company more competitive.Porter’s model identifies five major forces that can endanger or enhance a company’s position in a given industry. Figure 2.3 highlights these forces. Although the Web has changed the nature of competition, it has not changed Porter’s five fundamental forces. In fact, what makes these forces so valuable as analytical tools is that they have not changed for centuries. Every competitive organization, no matter how large or small, or which business it is in, is driven by these forces. This observation applies even to organizations that you might not consider competitive, such as local governments. Although local governments are not for-profit enterprises, they compete for businesses to locate in their districts, for funding from higher levels of government, for employees, and for many other things.FIGURE 2.3Porter’s competitive forces model. Significantly, Porter (2001)2 concludes that the overall impact of the Web is to increase competition, which generally diminishes a firm’s profitability. Let’s examine Porter’s five forces and how the Web influences them.The threat of entry of new competitors. The threat that new competitors will enter your market is high when entry is easy and low when there are significant barriers to entry. An entry barrier is a product or service feature that customers have learned to expect from organizations in a certain industry. An organization that seeks to enter the industry must offer this feature to survive in the marketplace. There are many types of entry barriers. Consider, for example, legal requirements such as admission to the bar to practise law or obtaining a licence to serve liquor, where only a certain number of licences are available.Suppose you want to open a gasoline station. To compete in that industry, you would have to offer pay-at-the-pump service to your customers. Pay-at-the-pump is an IT-based barrier to entering this market because you must offer it for free. The first gas station that offered this service gained first-mover advantage and established barriers to entry. This advantage did not last, however, because competitors quickly offered the same service and thus overcame the entry barrier.For most firms, the Web increases the threat that new competitors will enter the market because it sharply reduces traditional barriers to entry, such as the need for a sales force or a physical storefront. Today, competitors frequently need only to set up a website. This threat of increased competition is particularly acute in industries that perform an intermediation role, which is a link between buyers and sellers (e.g., stock brokers and travel agents), as well as in industries in which the primary product or service is digital (e.g., the music industry). The geographical reach of the Web also enables distant competitors to compete more directly with an existing firm.In some cases, however, the Web increases barriers to entry. This scenario occurs primarily when customers have come to expect a nontrivial capability from their suppliers. For example, the first company to offer Web-based package tracking gained a competitive advantage from that service. Competitors were forced to follow suit.The bargaining power of suppliers. Supplier power is high when buyers have few choices about whom to buy from and low when buyers have many choices. Therefore, organizations would rather have more potential suppliers so that they will be in a stronger position to negotiate price, quality, and delivery terms.The internet’s impact on suppliers is mixed. On the one hand, it enables buyers to find alternative suppliers and to compare prices more easily, thereby reducing the supplier’s bargaining power. On the other hand, as companies use the internet to integrate their supply chains, participating suppliers prosper by locking in customers.The bargaining power of customers (buyers). Buyer power is high when buyers have many choices about whom to buy from and low when buyers have few choices. For example, in the past, there were few locations where students could purchase textbooks (typically, one or two campus bookstores). In this situation, students had low buyer power. Today, the Web provides students with access to a multitude of potential suppliers as well as detailed information about textbooks. As a result, student buyer power has increased dramatically.In contrast, loyalty programs reduce buyer power. As their name suggests, loyalty programs reward customers based on the amount of business they conduct with a particular organization (e.g., airlines, hotels, car rental companies). Information technology enables companies to track the activities and accounts of millions of customers, thereby reducing buyer power. That is, customers who receive perks from loyalty programs are less likely to do business with competitors. (Loyalty programs are associated with customer relationship management, which you will study in Chapter 11.)The threat of substitute products or services. If there are many alternatives to an organization’s products or services, then the threat of substitutes is high. Conversely, if there are few alternatives, then the threat is low. Today, new technologies create substitute products very rapidly. For example, customers can purchase wireless telephones instead of land line telephones, internet music services instead of traditional CDs, and ethanol instead of gasoline for their cars.Information-based industries experience the greatest threat from substitutes. Any industry in which digitized information can replace material goods (e.g., music, books, software) must view the internet as a threat because the internet can convey this information efficiently and at low cost and high quality.Even when there are many substitutes for their products, however, companies can create a competitive advantage by increasing switching costs. Switching costs are the costs, in money and time, imposed by a decision to buy elsewhere. For example, contracts with smartphone providers typically include a substantial penalty for switching to another provider until the term of the contract expires (quite often, two years). This switching cost is monetary.As another example, when you buy products from Amazon, the company develops a profile of your shopping habits and recommends products targeted to your preferences. If you switch to another online vendor, then that company will need time to develop a profile of your wants and needs. In this case, the switching cost involves time rather than money.The rivalry among existing firms in the industry. The threat from rivalry is high when there is intense competition among many firms in an industry. The threat is low when the competition involves fewer firms and is not as intense.In the past, proprietary information systems—systems that belong exclusively to a single organization—have provided a strategic advantage to firms in highly competitive industries. Today, however, the visibility of internet applications on the Web makes proprietary systems more difficult to keep secret. In simple terms, when I see my competitor’s new system online, I will rapidly match its features to remain competitive. The result is fewer differences among competitors, which leads to more intense competition in an industry.To understand this concept, consider the highly competitive grocery industry, in which Loblaws, Metro, Sobeys, and other companies compete essentially on price. Some of these companies have IT-enabled loyalty programs in which customers receive discounts and the store gains valuable business intelligence on customers’ buying preferences. Stores use this business intelligence in their marketing and promotional campaigns. (You will learn about business intelligence in Chapter 12.)Grocery stores are also experimenting with RFID to speed up the checkout process, track customers through the store, and notify customers of discounts as they pass by certain products. Grocery companies also use IT to tightly integrate their supply chains for maximum efficiency and thus reduce prices for shoppers.Established companies can also gain a competitive advantage by allowing customers to use data from the company’s products to improve their own performance. For example, Babolat (www.babolat.ca), a manufacturer of sports equipment, has developed its Babolat Play Pure Drive racquets. These racquets have sensors embedded into the handle and a smartphone app uses the data from the sensors to monitor and evaluate ball speed, spin, and impact location to give tennis players valuable feedback.Competition is also being affected by the extremely low variable cost of digital products. That is, once a digital product has been developed, the cost of producing additional units approaches zero. Consider the music industry as an example. When artists record music, their songs are captured in digital format. Physical products, such as CDs or DVDs of the songs for sale in music stores, involve costs. The costs of a physical distribution channel are much higher than those involved in delivering the songs digitally over the internet.In fact, in the future, companies might give away some products for free. For example, some analysts predict that commissions on online stock trading will approach zero because investors can search the internet for information to make their own decisions regarding buying and selling stocks. At that point, consumers will no longer need brokers to give them information that they can obtain themselves, virtually for free.Porter’s Value Chain ModelOrganizations use Porter’s competitive forces model to design general strategies. To identify specific activities in which they can use competitive strategies for greatest impact, they use his value chain model (1985). A value chain is a sequence of activities through which the organization’s inputs, whatever they are, are transformed into more valuable outputs, whatever they are. The value chain model identifies points at which an organization can use information technology to achieve a competitive advantage (see Figure 2.4).FIGURE 2.4Porter’s value chain model. According to Porter’s value chain model, the activities conducted in any organization can be divided into two categories: primary activities and support activities. Primary activities relate to the production and distribution of the firm’s products and services. These activities create value for which customers are willing to pay. The primary activities are buttressed by support activities. Unlike primary activities, support activities do not add value directly to the firm’s products or services. Rather, as their name suggests, they contribute to the firm’s competitive advantage by supporting the primary activities.Next, you will see examples of primary and support activities in the value chain of a manufacturing company. Keep in mind that other types of firms, such as transportation, health care, education, retail, and others, have different value chains. The key point is that every organization has a value chain.In a manufacturing company, primary activities involve purchasing materials, processing the materials into products, and delivering the products to customers. Manufacturing companies typically perform five primary activities in the following sequence:Inbound logistics (inputs)Operations (manufacturing and testing)Outbound logistics (storage and distribution)Marketing and salesServicesAs work progresses in this sequence, value is added to the product in each activity. Specifically, the following steps occur:The incoming materials are processed (in receiving, storage, and so on) in activities called inbound logistics.The materials are used in operations, in which value is added by turning raw materials into products.These products are prepared for delivery (packaging, storing, and shipping) in the outbound logistics activities.Marketing and sales sell the products to customers, increasing product value by creating demand for the company’s products.Finally, the company performs after-sales service for the customer, such as warranty service or upgrade notification, adding further value.As noted earlier, these primary activities are buttressed by support activities. Support activities consist of the following:The firm’s infrastructure (accounting, finance, and management)Human resources managementProduct and technology development (R&D)ProcurementEach support activity can be applied to any or all of the primary activities. The support activities can also support one another.A firm’s value chain is part of a larger stream of activities, which Porter calls a value system. A value system, or an industry value chain, includes the suppliers that provide the inputs necessary to the firm along with their value chains. After the firm creates products, these products pass through the value chains of distributors (which also have their own value chains), all the way to the customers. All parts of these chains are included in the value system. To achieve and sustain a competitive advantage, and to support that advantage with information technologies, a firm must understand every component of this value system.Strategies for Competitive AdvantageOrganizations continually try to develop strategies to counter the five competitive forces identified by Porter. You will learn about five of those strategies here. Before we go into specifics, however, it is important to note that an organization’s choice of strategy involves trade-offs. For example, a firm that concentrates only on cost leadership might not have the resources available for research and development, leaving it unable to innovate. As another example, a company that invests in customer happiness (customer orientation strategy) will experience increased costs.Companies must select a strategy and then stay with it, because a confused strategy cannot succeed. This selection, in turn, decides how a company will use its information systems. A new information system that can improve customer service but will increase costs slightly will be welcomed at a high-end retailer such as Nordstrom’s, but not at a discount store such as Walmart. The following list presents the most commonly used strategies. Figure 2.5 provides an overview of these strategies.FIGURE 2.5Strategies for competitive advantage. Cost leadership strategy. Produce products and services at the lowest cost in the industry. An example is Walmart’s automatic inventory replenishment system, which enables the company to reduce inventory storage requirements. As a result, Walmart stores use floor space only to sell products and not to store them, thereby reducing inventory costs.Differentiation strategy. Offer different products, services, or product features than your competitors. Southwest Airlines, for example, has differentiated itself as a low-cost, short-haul express airline. This has proved to be a winning strategy for competing in the highly competitive airline industry.Innovation strategy. Introduce new products and services, add new features to existing products and services, or develop new ways to produce them. A classic example is the introduction of automated teller machines (ATMs) by Citibank. The convenience and cost-cutting features of this innovation gave Citibank a huge advantage over its competitors. Like many innovative products, the ATM changed the nature of competition in the banking industry. Today, an ATM is a competitive necessity for any bank. Another excellent example is Apple’s rapid introduction of innovative products.Operational effectiveness strategy. Improve the manner in which a firm executes its internal business processes so that it performs these activities more effectively than its rivals. Such improvements increase quality, productivity, and employee and customer satisfaction while decreasing time to market.Customer orientation strategy. Concentrate on making customers happy. Web-based systems are particularly effective in this area because they can create a personalized, one-to-one relationship with each customer. Amazon (www.amazon.com), Apple (www.apple.com), and Starbucks (www.starbucks.com) are classic examples of companies devoted to customer satisfaction.Business–Information Technology AlignmentThe best way for organizations to maximize the strategic value of IT is to achieve the “holy grail” of organizations: business–information technology alignment, or strategic alignment (which we will call simply alignment). Business–information technology alignment (business–IT alignment) is the tight integration of the IT function with the organization’s strategy, mission, and goals. That is, the IT function directly supports the organization’s business objectives. There are six characteristics of excellent alignment:Organizations view IT as an engine of innovation that continually transforms the business, often creating new revenue streams.Organizations view their internal and external customers and their customer service function as supremely important.Organizations rotate business and IT professionals across departments and job functions.Organizations provide overarching goals that are completely clear to each IT and business employee.Organizations ensure that IT employees understand how the company makes (or loses) money.Organizations create a vibrant and inclusive company culture.Unfortunately, many organizations fail to achieve this type of close alignment. In fact, according to a McKinsey and Company survey on IT strategy and spending, approximately 27 percent of the IT and business executives who participated agreed that their organization had adequate alignment between IT and the business. Given the importance of business and IT alignment, why do so many organizations fail to implement this policy? The major reasons are:Business managers and IT managers have different objectivesThe business and IT departments are ignorant of the other group’s expertiseThere is a lack of communicationPut simply, business executives often know little about information technology, and IT executives understand the technology but may not understand the real needs of the business. One solution to this problem is to foster a collaborative environment in organizations so that business and IT executives can communicate freely and learn from each other.The good news is that some organizations get it right. It is IT governance that helps organizations effectively manage their IT operations so that IT aligns with their business strategies.Organizational strategies take account of risks or potential problems that could occur and the opportunities that organizations have to serve their customers better or create more value for their stakeholders. In large organizations, the board of directors and executives are expected to effectively manage the organization, which is called corporate governance.According to CIO Magazine, IT governance is part of an organization’s overall corporate governance and is defined as “a formal framework that provides a structure for organizations to ensure that IT investments support business objectives.” An IT governance framework should answer questions related to business–IT alignment such as, What are the key objectives of the IT department? And what are the key metrics to measure the performance of the IT department?3 IT governance is about managing IT throughout the organization. This includes planning, acquisition, implementation, and ongoing support, as well as monitoring and evaluation so that decisions can be made about potential changes.Without effective IT governance, there are many things that could go wrong. Information systems might not meet organizational business objectives, or systems could be error-prone, over budget, or hard to use. If security was poor, data and programs could be damaged or copied by unauthorized individuals.Smaller businesses implement IT governance by having an aware and knowledgeable owner-manager who actively selects business practices and software.Businesses can also use enterprise architecture to foster alignment. Originally developed as a tool to organize a company’s IT initiatives, the enterprise architecture concept has evolved to encompass both a technical specification (the information and communication technologies and the information systems used in an organization) and a business specification (a collection of core business processes and management activities).Before you go on… What are strategic information systems?According to Porter, what are the five forces that could endanger a firm’s position in its industry or marketplaces?Describe Porter’s value chain model. Differentiate between Porter’s competitive forces model and his value chain model.What strategies can companies use to achieve competitive advantage?What is business–IT alignment?Provide examples of business–IT alignment at your university, regarding student systems. (Hint: What are the “business” goals of your university with regard to student registration, fee payment, grade posting, and so on?)