Strategic Analysis Value Chain Competitive Model Industry Structure Strategic Option Generator.

Strategic Analysis

• Value Chain

• Competitive Model

• Industry Structure

• Strategic Option Generator

Application ProblemApple Computer Inc. announced in May 2001 that it was expanding into the retail business, confirming that it had planned to open its first store on May 19, 2001. A computer industry analyst predicted that the company might open as many as 10 stores as part of a strategy to extend the Apple brand. By May 2002, Apple had actually opened 30 stores across 16 states in the U.S.

The retail strategy in general indicates that Apple is undaunted by the recent retrenchment of Gateway Computer, a predominantly mail-order company that has scaled back its retail plans. At the same time, Apple, which traditionally has relied on third-party retailers, has fared well going directly to consumers on its Internet store. Lynn Fox, an Apple spokeswoman, said Internet-based sales represented over 25 percent of the company's revenue in recent quarters.

In the case of Gateway, the company announced plans last month to close 38 under performing stores and to take a charge of $75 million, leaving it with about 300 stores. The company is also removing its sales stands from 1,000 OfficeMax stores.

In general, Apple has been hit by the downturn in the personal computer market. At the time Apple entered the off-line retailing arena, it announced second-quarter earnings that slightly exceeded expectations, but in the first quarter, the company reported its first loss since Steven P. Jobs, the company's co-founder and current chief executive, returned to Apple three years ago.

1.      Is Apple’s decision to open retail stores represent a strategic shift? Why or why not?

2.      Does this move create / enhance Apple’s competitive advantage? Positional or capability-driven or both?

3.      What potential risks does this move entail for Apple?

4. Would you characterize this move as exploratory or exploitative? What would be the critical success factors?

Porter’s Value Chain

- How do we create value for customers?

- Primary activities directly create value

- Support activities help create value

- Value added = output value – input value

Supportactivities

Corporate infrastructure

Human resource management

Technology development

Procurement

Inboundlogistics

Primaryactivities

Operations Outboundlogistics

Marketingand sales

Service

Margin

The Value Chain

Four Support Activities

Support Activities

Description Internet Application

Corporate infrastructure

General management

Human resource management

Hiring, training, & development.

Technology development

Improving product / process

Procurement Function or purchasing input.

Five Primary Activities

Primary Activity

Description Internet Application

Inbound logistics Receive, store, and distribute.

Operations Transform inputs into products.

Outbound logistics

Store & distribute products.

Marketing and sales

Promotion and sales force.

Service Customer service

Airline Industry Value Chain

INBOUNDLOGISTICS

OPERATIONS OUTBOUNDLOGISTICS

MARKETING AND SALES

SERVICE

PROCUREMENT

TECHNOLOGY DEVELOPMENT

HUMAN RESOURCE

MANAGEMENT

FIRM INFRASTRUCTURE

Financial AccountingPolicy

Regulatory Compliance

Legal Community Affairs

Pilot TrainingSafety Training

AgentTraining

In-flight Training

Baggage Tracking System

•Promotion•Advertising•Advantage Program•Travel Agent Programs•Group Sales

•Ticket Counter Operations•Gate Operations•Aircraft Operations•On-board Service•Baggage Handling•Ticket Offices

•Route Selection•Passenger Service System•Yield Management System (Pricing)•Fuel •Flight Scheduling•Crew Scheduling•Facilities Planning•Aircraft Acquisition

Information TechnologyCommunications

Product Development

Market Research

•Lost Baggage Service•Complaint Follow-up

•Baggage System•Flight Connections•Rental Car and Hotel Reservation System

Computer Reservation System, In-flight System, Flight Scheduling System, Yield Management System

Baggage HandlingTraining

Flight, route andyield analysttraining

Supportactivities

Corporate infrastructure

Human resource management

Technology development

Procurement

Inboundlogistics

Operations Outboundlogistics

Marketingand sales

Service Margin

The Value Chain

Pre-Internet: Materials flow paramount

With Internet: Information flow equally important

Info

rmat

ion

Primaryactivities

Information

Value Analysis Questions

• Clarifying Value Chain Statements- Can we improve our supply chain and or

distribution system to increase inventory turns?

- Can we realize significant margins by consolidating parts of the value chain to my customers?

• Creating New Values- Can we improve customer service?

- Can we use our ability to attract customers to increase revenue thru cross-sales or up-sales?

Strategic Analysis

• Value Chain

• Competitive Model

• Industry Structure

• Strategic Option Generator

IndustryCompetitors

Intensityof rivalry

Suppliers Buyers

New entrants

Substitutes

Bargaining power of suppliers

Bargaining power of buyers

Threat of substitute

s

Threat of

entrants

Elements of Industry Structure

Entry BarriersEconomies of scale

Proprietary product differences

Brand identity

Switching costs

Capital requirements

Access to distribution

Absolute cost advantages

Proprietary learning curve

Access to necessary inputs

Government policy

Expected retaliation

Rivalry DeterminantsIndustry growth

Fixed (or storage) cost/Value added

Intermittent overcapacity

Product differences

Brand identity

Switching costs

Concentration and balance

Informational complexity

Diversity of competitors

Corporate stakes

Exit barriers

Relative price performance of

substitutes

Determinants of Substitution

ThreatSwitching costs

Buyer propensity to

substitute

Determinants of Buyer Power

Bargaining Leverage Price Sensitivity

Buyer concentration versus firm concentration

Price/Total purchases

Buyer volume Product differences

Buyer switching costs relative to firm switching costs

Brand identity

Buyer information Impact on quality/Performance

Ability to backward integrate Buyer profits

Substitute products Decision-makers’ incentives

Pull-through

Determinants of Suppliers Power

Differentiation of inputs

Switching costs of suppliers and firms in the industry

Presence of substitute inputs

Supplier concentration

Importance of volume to supplier

Cost relative to total purchases in the industry

Impact of inputs on cost or differentiation

Threat of forward integration relative to threat of backward integration by firms in the industry

Impact of Competitive ForcesForce Implication

Potential Uses of IT to Combat Force

Threat of new entrants

Buyers’ bargaining power

Suppliers’ bargaining power

Threat of substitute products or services

Traditional intraindustry rivals

New capacitySubstantial resourcesReduced prices or inflation of incumbent’s costs

Prices forced downHigh qualityMore servicesCompetition encouraged

Prices raisedReduced quality and services (labor)

Potential returns limitedCeiling on prices

Competition: Price Product Distribution and service

Provide entry barriers: Economies of scale Switching costs Product differentiation Access to distribution channels

Buyer selectionSwitching costsDifferentiationEntry barriers

Supplier SelectionThreat of backward integration

Improve price/performanceRedefine products and services

Cost-effectivenessMarket accessDifferentiation:Product / Services / Firm

Porter and Millar

Limitations of the Five Forces Model

• Manufacturing rather than service focus

• Some support functions (IT) are integral part of primary activities

• Adversarial relations, no cooperation

• Complementors, outsourcers, partners?

Strategic Analysis

• Value Chain

• Competitive Model

• Industry Structure

• Strategic Option Generator

What Is an Industry?§ Firms may make multiple lines of products / services

§ We can define an industry in terms of close substitutes.

§ Complementary products belong to different industries if sold separately!

Industry Value Chain

Suppliers Manufacturer Distribution

Industry Structure: Before Wal-Mart

Intra-Industry Rivalry

Rivals: Kmart, Sears, Specialty Stores

BargainingPower of Buyers

Bargaining Power

of Suppliers

Threat of Substitutes

Threat of Entrants

• Consumers in Small Town U.S.A. • Consumers in Metropolitans Areas in the U.S.

• Mail Order• Buying Clubs

• U.S. Product Manufacturers• Foreign Manufacturers• I/T Suppliers

• Foreign General Merchandisers or Discounters• Established Retailer Shifting Strategy to Discounting or Megastores

• Telemarketing• Door-to-door Sales

Industry Structure: After Wal-Mart

Intra-Industry Rivalry

Rivals: Kmart, Target, Sears,Toys R Us, Specialty Stores

BargainingPower of

Buyers

Bargaining Power

of Suppliers

Threat of Substitutes

Threat of Entrants

• Consumers in Small Town U.S.A. • Consumers in Metropolitans Areas in the U.S.

• Mail Order• Home Shopping Network• Electronic Shopping

• U.S. Product Manufacturers• Foreign Manufacturers• I/T Suppliers

• Foreign General Merchandisers or Discounters• Established Retailer Shifting Strategy to Discounting or Megastores

• Telemarketing• Buying Clubs• Door-to-door Sales

Seller Seller

Original Intermediary

Original Intermediary

Buyer Buyer

Channel Facilitator:

autobytel.com

Channel Facilitator vs. Channel Competitor

Channel Competitor: Southwest

How does the Internet alter industry structure?

• Buyer Power

• Supplier Power

• Threat of New Entrants

• Threat of Substitutes

• Rivalry

Emergence Growth Maturity Decline

Time

Indu

stry

Sal

esThe Industry Life Cycle

The Industry Life Cycle: Caveats

• Many unexpected turns can occur– Maturing industry begins to grow with new technology or use

– Growing industry begins to decline as substitutes appear

• Rate of change differs across industries– Automobiles versus PCs

– B2C & B2B

The Industry Life Cycle StagesEmergence: One among many approaches succeed

Maintain focus in the face of uncertainty

Internet Gold Rush 1999-2000

Growth: From vision to production and distribution

Consolidation and scale up

New entries, yet muted competition!

Maturity & Decline: Entrenched leaders

Dwindling customer base

Profit still possible

Competitive Rivalry from

Existing Firms

Technology

Regulatory Environment

Changing Social Values

Substitutes

SuppliersBuyers

New EntrantsEconomic

Changes

Demographic Changes

External Forces Affecting Competition

Strategic Analysis

• Value Chain

• Competitive Model

• Industry Structure

• Strategic Option Generator

Strategic Thrusts (Advantage)

• Cost: Reduce cost for same output

• Differentiation: Unique and appealing

• Innovation: New products, new processes

• Growth: Size is often a must

• Alliance: Can’t do it all, who may join hands?

• Segment: Size of market segment

• Vertical: Make vs. Buy decisions

• Geographic: Parts of domestic / foreign markets

• Industry: Range of related industries

Competitive Scope

Competitive Strategy: Mode

• Offensive — usually takes place in an established competitor’s market

• Defensive — takes place in the firm’s own current market position as a defense against possible attack by a rival

• Cooperative — partnership of two or more corporations or business units to achieve strategically significant objectives that are mutually beneficial

TARGET

CUSTOMER COMPETITORSUPPLIER

THRUST

DIFFERENTIATION COST INNOVATION GROWTH ALLIANCE

MODE

DIRECTION

OFFENSIVE DEFENSIVE

INTERNAL EXTERNAL

EXECUTION

COMPETITIVE ADVANTAGE

Source - Wiseman: Strategy and Computers: Information Systems as Strategic Weapons, Richard D. Irwin.

Strategic Option Generator

COOPERATIVE

TARGET

CUSTOMER COMPETITORSUPPLIER

THRUST

DIFFERENTIATION COST INNOVATION GROWTH ALLIANCE

MODE

DIRECTION

OFFENSIVE DEFENSIVE

INTERNAL EXTERNAL

EXECUTION

COMPETITIVE ADVANTAGE

Federal Express: Absolutely Positively Overnight

Source - Wiseman: Strategy and Computers: Information Systems as Strategic Weapons, Richard D. Irwin.

COOPERATIVE

• Change basis of competition to disadvantage

• Lower entry barrier

• Bring on litigation or regulation

• Increase power of customers or suppliers

Risks Of Strategic Systems (Logic?)

Classical Strategic Planning Model

BusinessPlan

TacticalPlan

StrategicPlan

Environment(External)

Opportunities

Threats

Strengths

Weaknesses

Enterprise(Internal)

Goals

Objectives

Strategy Formulation

Culture/ Values

Business Unit

Functional Programs

MajorProjects

DetailedProjects

Resources:Headcount,Capital andExpenseBudgets

MissionVision

EC Strategy

What questions should a strategic plan answer?

– How is Electronic Commerce going to change our business?

– How do we uncover new types of business opportunities?– How can we take advantage of new electronic linkages with

customers and trading partners?– Will intermediaries be eliminated in the process? Or do we become

intermediaries ourselves?– How do we bring more buyers together electronically (and keep them

there)?

– How do we change the nature of our products and services?

– How is the Internet affecting our industry structure?

– How do we manage and measure the evolution of our strategy?