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External EnvironmentInternal Activities Corporate Strategy Value Chain Analysis Competitive Forces IT-Enabled Strategy...  Porter’s theories value chain, competitive forces  How can Po

ISMT 101

IS & Business Integration

Business implications

EB (7)

(1) Digital Economy Major IS (1)

People

Mgmt

(10) IS-Biz Integration

Now we move to the strategic level…

• Does IT indeed payoff?

• Why do some firms obtain real benefits while others

Does IT indeed payoff

“We see computers everywhere, but in the

productivity statistics.”

Robert Solow, Nobel Prize-winning economist

 Substantial IT investment has been made

 But, in general, IT-performance relationship is not clear

Substantial tech investment, but…

Economy Slowdown in the G5

-0.01 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1

Country-level recap

 Substantial IT investment was made worldwide.

 However, the substantial IT investment was

associated with country-level economic

slowdown.

IT leads to different outcomes

Firm-level recap

 At the firm level, there is a positive relationship

between IT investment and firm performance.

 But, companies have achieved vastly different

results.

 IT does not help improve firm performance, if there

is no clear strategy.

External Environment

Internal Activities

Corporate Strategy

Value Chain Analysis

Competitive Forces IT-Enabled

Strategy

What’s strategy?

 Doing things right?

 Doing right things?

Doing right things—leapfrogging

Leapfrogging in WWII

 When the US Navy joined

the Pacific War, the

Japanese Navy had

captured many islands

 Strategy 1—attack those

islands one by one

(123456)

 Strategy 2—”leapfrogging” 2

3 4

5 6

 Long-term planning of business operations in

a specific market to improve firm performance

 strategy offers a guideline for the internal operations

(logistics, operations, marketing, and services)

 strategy fits into the external environment

 the objective is to improve profitability, ROA, stock

market return

Leapfrogging by IBM

 In 1980s, Apple was successful in the PC industry

 IBM wanted to quickly build its PC

 IBM also used “leapfrogging” strategy

Operating System Microprocessor

Assembly

Leapfrogging by IBM

 Is IBM’s leapfrogging strategy good or bad?

 Worked in short term

 In long-term, is this a good strategy??

 What theories can be used to analyze IT strategy?

 Porter’s theories (value chain, competitive forces)

 How can Porter’s theories be applied to analyze enabled corporate strategy

IT- our analysis is IT-specific

 IBM, Dell, Harrah’s, Cisco, Wal-Mart

Value Chain in Industry

The value chain of PC industry

The value chain of PC industry

 Shifting trend:

 US companies shift from “covering the whole chain”

to design

 Chinese companies (mainland and Taiwan) are

dominating physical production

 Design requires innovation capability.

 Such capability can be acquired only in a

learning-by-The value chain of PC industry

 Physical production is labor-intensive.

 In the PC industry, the profit margin of the design phase is much higher than that of mass

production.

 More value is added in the design phase

Value Chain within a Firm

organization that bring products and services to market

Value Chain

 Primary activities – take raw materials and

transform them into something of greater value

 E.g., purchase steel  make parts, engines  assemble a car

 E.g., purchase from wholesalers  sell to consumers

Including…

 Inbound logistics: purchasing and receiving the raw materials

 Operations: making products using raw materials

 Outbound logistics: delivering to buyers

 Marketing and sales: distributing product info and making sales

Value Chain

 Supporting activities – those functions that the company requires to do business but do not

directly add value to a product or service

 HR management (recruiting, hiring, and training)

 Procurement of MRO (Maintenance, Repair and

Operations) and office supply

 Accounting office

Value Chain

 Value is added when a company conducts value chain activities.

 Each activity will add some value

 Total value added will lead to profit.

 Greater profit margin comes from greater value added

 IT can enhance the value added process.

IT can increase efficiencies of each value chain activity

IT and value chain

IT can support specific value chain activities…

 Supply chain management (SCM) systems help

reduce logistics costs.

 Enterprise resource planning (ERP) systems help reduce operational costs.

 Customer relationship management (CRM) systems help reduce costs in customer-oriented activities.

 Sell directly to consumers

 Allow customers build own models

 Quickly launch newer models/technologies

 Use EDI to connect all suppliers

 Enjoy above-average profitability

Which value chain activity is Dell’s primary focus?

Case 1

Dell

 Dell uses IT to support JIT (just-in-time) inventory mgmt.

 With JIT, Dell only carries a small amount of the raw

materials.

 Efficient inbound logistics supports BTO.

 Low inventory allows Dell to offer customized computers with the latest technologies/models.

3-Step Value Chain Analysis

1. Describe the specific activities within your company’s specific activities

value chain

2. Choose a particular portion of the value chain,

3. Use IT to improve your company’s performance on IT to improve

those activities of your focus

Case 2

Harrah’s casino

 Web-based “Total Gold” program, receiving US patent

 Online database allowing repeat customers to earn

rewards based on the amount of time and money they spend

 Track consumer behavior, improve customer loyalty

 Harrah’s is better able to identify and meet customer demand.

Case 3

Cisco

 Web-based Hub that connects all suppliers.

 Using that Hub, Cisco outsourced manufacturing, logistics, marketing, and services.

 Cisco is fully focused on R&D.

 Has achieved product leadership over years in the

networking HW markets.

Porter’s Competitive Forces Model

 Unlike the value chain analysis, the Competitive Forces Model deals with external factors

Industry competitors

Intensity

of rivalry

Industry competitors

Intensity

of rivalry Suppliers

of customers

New entrants Threat of

new entrants

Threat of

Porter’s Competitive Forces Model

 Profitability = f (rivalry, threat of substitution,

threat of new entrants, bargaining power of suppliers, bargaining power of customers)

 Rivalry (–) : price cut

 Threat of substitution (–) : reduce revenue

 Threat of new entrants (–) : price war, increase rivalry

 Bargaining power of suppliers (–) : increase costs

revisited

 Mistake #1—outsourced microprocessor to Intel

 Microprocessor makers may enjoy high profitability, due to high entry barrier

 This is a technology-intensive area, requiring learning-by-doing over years

 Mistake #2—outsourced OS to Microsoft

 OS developers may enjoy high profitability

 Consumers face high costs of switching to another OS

 Mistake #3—work in a low-entry-barrier sector, computer assembly, which becomes very competitive today

A case study – HP

 To illustrate the importance of considering external factors

 Hewlett-Packard (HP)

A case study – HP

 In the 1980s, HP set up its R&D and manufacturing divisions in Washington.

 the biggest market for printers was in the US.

 the technology development was still in an early stage.

 Later, HP set up the manufacturing facilities in Spain and Singapore

 when demand grew in other parts of the world

 Singapore become the largest production facility

 because there were more competitors in the market

Porter (2001), Harvard Business Review

 IT  Rivalry among existing competitors

 (-) Increased price pressure due to price transparency

 (+/-) Increased geographic competition, but larger

markets

How IT affect Porter’s Five Forces

Porter (2001), Harvard Business Review

 IT  Barriers to entry

 (-) Due to substitution of electronic for physical assets

 (+) Cost of IT investment itself can be an entry barrier

 (+) IT-enabled asset can be an entry barrier

 E.g., online reputation system at eBay

How IT affect Porter’s Five Forces

Porter (2001), Harvard Business Review

 IT  Threat of substitute products/services

 (+) IT can increase efficiency and increase the size of the pie (i.e., the entire market)

 E.g., ATM and banking

 (+/-) Disintermediation can create new opportunities and threats

 E.g., Dell versus Best-Buy

How IT affect Porter’s Five Forces

Porter (2001), Harvard Business Review

 IT  Bargaining power of buyers

 (-) Reduced search and switching costs of buyers

 (+) Eliminates powerful channels (i.e., downstream corporate buyers), increasing bargaining power

How IT affect Porter’s Five Forces

Porter (2001), Harvard Business Review

 IT  Bargaining power of suppliers

 (+/-) Online procurement can shift bargaining power relative to physical channels

 (-) Disintermediation: Suppliers can reach end users directly

How IT affect Porter’s Five Forces

Direct Sale

High

Medium

Low High

PC industry rivalry =Threat of new entrants =Threat of substitution = Bargaining power of

IT and competitive forces

Strategic questions:

 Can IT be incorporated into or

generate products/services?

 Can IT create entry barriers?

 Can IT lock-in customers?

 Can IT change the basis of

competition?

 Can IT change the relationship

with suppliers and partners?

Dell’s strategy to combat the 5 forces

Direct Sale

Web-based customization helps lock-in consumers

Efficient inbound logistics enable

External Environment

Strategies to achieve competitive advantage

 Competitive advantage: above-average profit within

an industry

To achieve competitive advantage…

 Cost leadership strategy seeks to provide goods and services at the lowest price lowest

 Differentiation strategy seeks to provide unique unique

products and services that customers value.

External Environment

External Environment

How Wal-Mart Does It?

External Environment

External Environment

Homework – analyzing a new case

Industry features

 Low-tech industry—different than Dell

 Mature products—different than Cisco

 Less room to enhance customers’ experience— different than Harrah’s

 More like Wal-Mart, but lack monopoly power

Homework – analyzing a new case

Case analysis

1. How to use IT to improve efficiencies of (some

of) the value chain activities

2. How to use IT to shape (some of) the five

competitive forces

3. What is the best strategy among the three

Approach to competitive advantage

 Create entry barrier (tech leadership, monopoly)

 E.g., Cisco, Wal-Mart

 Develop systems with high switching costs

 E.g., Dell, eBay, Harrah’s

 Use IT to change the industry nature

 E.g., Skype