INFORMATION TECHNOLOGY IN BUSINESS AND SOCIETY SESSION 4 - IT STRATEGY AND COMPETITIVENESS SEAN J. TAYLOR.

INFORMATION TECHNOLOGY IN BUSINESS AND SOCIETYSESSION 4 - IT STRATEGY AND COMPETITIVENESS

SEAN J. TAYLOR

ADMINISTRATIVIA

• Facebook Experiment participation now $10! I will email.

• Office hours moved to Friday: 3:30-5:30 KMC 8-191

• Varun’s office hours on Monday: 3-5pm in 8th floor tutoring area

• Assignment 1 will be handed out on Tuesday (available over the weekend)

• Blackboard?

• Thanks to Jasmin and Alice for Tumblr advice!

LEARNING OBJECTIVES

1. List four key Internet-enabled strategies and provide examples for each.

2. Understand how IT may affect each of the five forces in Porter’s model of industry competitiveness.

3. Understand the difference between sustaining and disruptive innovations.

LOWER COSTS AND BETTER PRODUCTS

HOW DOES IT LOWER COSTS?Substitute information for physical assets or goods

• Information vs. parts inventory (Dell, Toyota)• Information vs. finished-goods inventory (Zara, Cisco, Walmart)

Increase the output from the same payroll

• Enable employees to work faster (tax returns at H&R Block)• Expand skills of employees (Progressive)• Outsourcing to lower cost regions (Microsoft call centers)

Substitute information technology for labor

• Self Service (FedEx, Citibank, Delta)• Automation (e.g., factory automation—Ford, Toyota)

HOW DOES IT ENABLE BETTER PRODUCTS?Increase product quality

• Create better products, enabled by IT (UPS, Progressive)

• Overlay better IT-enabled service on existing products (Amazon)

Increase product variety and ‘fit’

• Use local information about demand patterns (Zara)• Find out what your customers want and build it (Dell)• Convert uniform products into differentiated ones (Yahoo)

Increase pre-sale and after-sale support

• Pleasurable Buying Experience (Amazon’s One Click Shopping) • Expedited shipping and easy return policies (Zappos)

FOUR KEY INTERNET-ENABLED STRATEGIES4 Key Internet-enabled Strategies for Competitive Advantage:

1. Disintermediation

2. Mass Customization

3. Personalization

4. Global Reach

DISINTERMEDIATIONWhat it is

• Disintermediation: bypassing one or more intermediaries• Typically enables manufacturers to sell directly to consumers• Often replaces one intermediary (retailer) with another (FedEx)

Some effects on product costs

• Information vs. finished goods (products on retail shelves)• Information vs. physical assets (warehouses)• (IT + consumer) vs. labor

The role of IT

• The Internet (and primarily the Web) provides an interactive direct channel of communication between firms and customers

DISINTERMEDIATION

Disintermediation

Using the Internet as a delivery vehicle, intermediate players in a distribution channel can be bypassed.

MASS CUSTOMIZATIONWhat it is

• Consumers play a role in customizing their products/services • Could be a physical product (computer, clothing) or a service

(personal web portal)

The role of IT

• The Internet (and primarily the Web) provides an interactive direct channel of communication between firms and customers

• IT also often plays a role in the manufacturing systems used

Some effects on product value and costs

• Increases product fit• May increase product value• Can substitute information for physical inventory• Cheaper than old-style production processes

EXAMPLES OF MASS CUSTOMIZATION

PERSONALIZATIONWhat it is

• A vendor can know enough about the customer to fashion offers that are more likely to appeal to him/her.

The role of IT

• Content filtering: Recommends items based on their similarity to what a given person has liked in the past.

• Collaborative filtering: Recommends items based on purchases made by people with similar characteristics.

Some effects on product value and costs

• Reduces customer’s “search cost”• May increase product fit and value• May reduce or may increase product costs

EXAMPLES OF PERSONALIZATION

GLOBALIZATION

• IT enables coordination of organizational activities across wider geographic areas

• Can outsource activities to areas with better skills or cheaper labor

• Selling in many countries yields economies of scale

Business strategy affects the profits of an individual firm

THE FIVE COMPETITIVE FORCES

The five forces determine profitability of an industry• The higher each of these forces, the closer the industry is to ‘perfect

competition’, and the lower the average profits per firm• However well a company executes its strategy, its profits are often limited

by its industry’s competitiveness

THE FIVE COMPETITIVE FORCES: REVIEW

Industry that you are analyzing

(focal industry)Bargaining Power

of Suppliers

The bargaining power of the firms that sell

inputs to the firms in the focal industry

Bargaining Powerof Buyers

The bargaining power of the customers that buythe finished products of

the firms in the focal industry

Barriers to Entry, orThreat of new Entrants

The threat of entryby potential entrants

(new firms) into the focal industry

Threat of SubstituteProducts or Services

The threat of products/services that could substitute (be used

instead of) the finished products made by the firms in the focal industry

Rivalry AmongExisting Competitors

The extent of rivalry between the existing firms

in the focal industry

firm = company = organization = business = competitor

INTRA-INDUSTRY RIVALRY

Some factors that increase intra-industry rivalry

• Lots of firms in the industry, Slow market growth rate• High fixed costs • Competing firms offer similar products

Examples of how IT affects rivalry between firms

• The Internet globalizes commerce, increasing # of firms. Profits:

• Web-based personalization can reduce product similarity. Profits:

Intra-industry rivalry decreases prices

BARGAINING POWER OF BUYERS

Some factors that increase buyer power

• If the buyer purchases in large volumes (Circuit City, Sears, Walmart)• If buyers can easily switch to a competing supplier (Auto companies)• If buyers know a lot about your rival’s prices (Internet/Shopbots)• Threat of backward integration (NFL vs TV networks)

Examples of how IT affects buyer power• IT-administered loyalty programs foster ‘stickiness’. Profits:

• The Internet provides buyers with detailed information (Edmunds). Profits:

• IT requires special skills – “lock-in”. Profits:

(Windows vs. Mac)

When your buyers have power, you can’t raise prices

BARGAINING POWER OF SUPPLIERS

Examples of how IT affects supplier power

• Internet-based B2B markets make switching suppliers easier. Profits:

• Outsourcing key processes increases supplier dependence. Profits:

When your suppliers have power, your costs are higher

• If there are a few large suppliers (Intel & PC manufacturers, pharmaceuticals & hospitals)

• Threat of forward integration (Movie studios and theatres)• If your industry is a small part of these suppliers’ demand• If buyers find it difficult to switch from existing suppliers (Microsoft)

Some factors that increase supplier power

THREAT OF NEW ENTRANTSThe threat of entry lowers the prices firms can charge

Some factors that decrease the threat of new entrants

Examples of how IT affects ‘barriers to entry’

• ATM networks increase costs of setting up retail banking. Profits:

• Internet-based channels permit direct customer access. Profits:

• Economies of scale (Large physical investments: Autos, Utilities)• High capital requirements (Advertising, R&D: Autos)• Learning/experience curves (Skilled Labor: Operating Systems, Pharma)• Brand Identity (Soft-drinks, OTC Drugs, I-Banking)• Limited access to distribution channels (Supermarket goods, clothing)• Government Policy (Utilities, television stations, cable)

THREAT OF SUBSTITUTES

Examples of how IT affects the threat of substitutes

• Phone-PDA convergence has all but killed PDAs, video iPods/phone threaten portable DVD players. Profits:

• Continuous product improvement and differentiation keeps customers from moving to potential substitutes. Profits:

If prices in an industry rise, customers use substitutes

Similar to threat of entry, but from similar products (or companies) in similar/neighboring industries rather than new firms entering your industry

Buyers

Bargaining Powerof Suppliers

Bargaining Powerof Buyers

Threat of NewEntrants

Online video rentals

Threat of SubstituteProducts or Services

Rivalry AmongExisting CompetitorsSuppliers

Existing firmsPotential entrants

Substitute products/services

Discussion: Online DVD rentals

Who are the players?

Bargaining Powerof Suppliers

Bargaining Powerof Buyers

Threat of NewEntrants

Online video rentals

Threat of SubstituteProducts or Services

Rivalry AmongExisting Competitors

Online DVD: Characterizing the 5 Forces

Rivalry AmongExisting Competitors

• One major supplier per film/show

• Each firm needs a relationship with each supplier

• There are only a few suppliers (barriers to entry are relatively high in the movie business).

• Switching isn’t too hard.

• Piracy is growing.

• Lots of competitors.

HIGH

MODERATE-HIGH

• Differentiation is low.

• Product is a commodity.

• Prices?, Demand?

HIGH • Some capital requirements, some

economies of scale.

• Access to channels not restricted.

• Studio relationships a barrier.MODERATE-HIGH

• Attention is limited.

• But movies aren’t going anywhere.

• In recession people go to movies LOW

VIDEO ON DEMAND

THE INNOVATOR’S DILEMMA

1. Sustaining innovations

• improve product performance2. Disruptive innovations

• Result in worse performance (short-term)• Eventually surpass sustaining technologies in

satisfying market demand with lower costs• cheaper, simpler, smaller, and frequently

more convenient to use

SUSTAINING VS. DISRUPTIVEINNOVATIONS

THE INNOVATOR’S DILEMMA

• Barriers to innovation make it difficult to invest in disruptive technology

• Experience/learning and substantial investments mean companies are set in their ways

• Established customer base to whom they are held accountable.

• Customers often ask for better versions of current products rather than completely new technologies.

“DISCOVERING MARKETS FOR EMERGING TECHNOLOGIES INHERENTLY INVOLVES FAILURE, AND MOST INDIVIDUAL DECISION MAKERS FIND IT VERY DIFFICULT TO RISK BACKING A PROJECT THAT MIGHT FAIL BECAUSE THE MARKET IS NOT THERE.”

-CLAYTON CHRISTENSEN, THE INNOVATOR'S DILEMMA

DISRUPTIVE INNOVATIONS

More?

LEARNING OBJECTIVES

1. List four key Internet-enabled strategies and provide examples for each.

2. Understand how IT may affect each of the five forces in Porter’s model of industry competitiveness.

3. Understand the difference between sustaining and disruptive innovations.

1. “THE INNOVATOR’S DILEMMA”2. “RACE AGAINST THE MACHINE”

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