strategy and the internet

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Strategy and The InternetCUHK Business School Greta Zhang

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In the Wave of

Information Technology

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A Brief History of IT in Biz

• The 2nd wave of IT• 1980s to 1990s• Coordination and

integration across individual activities, with outside suppliers, channels, and customers.

• Michael E. Porter《 Strategy and the Internet》

• NOW, it’s the 3rd wave of IT

• IT is becoming an integral part of the product itself…

• Michael E. Porter and Jim Heppelmann 《How Smart,

Connected Products are Transforming Competition》

• The 1st wave of IT

• 1960s to 1970s • Automated

individual activities in the value chain, from ordering processing and bill paying to computer-aided design and manufacturing resource planning...

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Does strategy (still) matter?

WHO’S WHO?WHO’S MICHAEL E.PORTER?

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WHO’S WHO?WHO’S MICHAEL E.PORTER?

Leading authority on competitive strategy

His work is recognized in many governments, corporations and academic circles globally

Bishop William Lawrence University Professor at Harvard Business School

Introduction

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Smart Connected Products

New Strategy

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Part I

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“Does the Internet render established rules about strategy obsolete?”

-Michael E. Porter

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YES, STRATEGY MATTERS.

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The Idea in BriefPorter argues (2001): Strategy matters.

The Internet makes strategies more vital than ever.

BUT Why and How?

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CONTENTS► The Basic Concept of Porter’s Competitive Model

► The Application of the Internet in the Value Chain

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OBJECTIVES► Gain Competitive Advantage

► Understand the Forces that Influence Competitive Advantage

► Know How to Use Models to Do an Objective Evaluation

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QUESTIONS TO GET YOU PONDERING Can the Internet or information

technology build in cost and make difficult for a customer to switch suppliers?

Can it change the basis for competition within the industry?

Can it change the balance of power in the relationship that a company has with customers or suppliers?

Can it provide the basis for new product and services, new markets or other new business opportunities?

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An Overview ofPorter Five Forces Analysis

A framework to analyze the level of competition within an industry and

business strategy development

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Porter Five Forces Analysis

I. Threat of New EntrantsII. Threat of Substitute Products or

ServicesIII.Bargaining Power of BuyersIV.Bargaining Power of SuppliersV. Intensity of Competitive Rivalry

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What does each force mean?Why analyze all five competitive forces?

Gain a complete picture of what is influencing profitability in your industry

Identify game-changing trends early

Spot ways to handle constraints on profitability-or even to shape the forces in your favor

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Awareness of competitive forces can help a company stake out a position in its industry that is less vulnerable to attack.

-Michael E. Porter

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I. Threat of New Entrants

• Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry.

• Entrants, armed with new capacity and starving for market share, can ratchet up the investment required for you to stay in the game.

• Factors that can have an effect on how much of a threat new entrants may pose include:

The existence of barriers to entry (patents, rights, etc.)

Government policy Capital requirements

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II. Threat of Substitute Products or Services

• The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives.

• Substitute offerings can lure customers away.

• Factors that can have an effect on how much of a threat substitute products or services may pose include:

Buyer propensity to substitute Relative price performance of substitute Buyer switching costs

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III. Bargaining Power of Buyers• The bargaining power of buyers is described as the market

of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes.

• Customers can force down prices by playing you and your rivals against one another.

• Factors that can have an effect on how much of bargaining power of buyers may pose include

Buyer concentration to firm concentration ratio Degree of dependency upon existing channels of

distribution Bargaining leverage

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IV. Bargaining Power of Suppliers • The bargaining power of suppliers is described as the

market of inputs. Suppliers of raw materials, components, labor, and services to the firm can be a source of power over the firm when there are few substitutes.

• Suppliers can constrain your profits if they charge higher prices.

• Factors that can have an effect on how much of bargaining power of suppliers may pose include:

Impact of inputs on cost or differentiation Presence of substitute inputs Strength of distribution channel

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V. Intensity of Competitive Rivalry• Porter’s intensity of rivalry in an industry affects the

competitive environment and influences the ability of existing firms to achieve profitability.

• Low intensity of rivalry makes an industry more attractive and increases profit potential for the firms already competing within that industry.

• High intensity of rivalry makes an industry less attractive and decreases profit potential for the firms already competing within that industry.

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Example: Heavyweight Motorcycle Manufacturing Industry in North American Market

Bargaining Power of Suppliers:

Parts ManufacturersElectronic ComponentsMachine Tool Vendors

Potential New Entrant:Foreign Manufacturers

New Startup

Substitute Products:Automobiles

Public TransportationBicycles

Bargaining Power of Buyers:

Law EnforcementYoung AdultsMilitary Use

Intra-Industry Rivalry

SBU: Harley-Davidson

Rivals: Honda, BMW, Suzuki,

Yamaha

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Example: Mobile Phone Industry

https://www.youtube.com/watch?v=h7ve8WhgF6c

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How can the Internet be used to create economic value?

Industry StructureSustainable Competitive Advantage

It determines the profitability of the average competitor.

It allows a company to outperform the average competitor.

Two fundamental factors that determine profitability

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The Internet and Industry Structure

• Whether an industry has structural attractiveness or nor is determined by five competitive forces.

1. The intensity of rivalry among existing competitors

2. The barriers to entry for new competitors

3. The threat of substitute products or services

4. The bargaining power of buyers5. The bargaining power of suppliers

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The Internet and Industry Structure

• In combination, these forces determine how the economic value created by any product, service, technology, or way of competing.

SO how on earth does the internet influence industry

structure, and thus profitability?

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How the Internet Influences Industry Structure

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Threat of Substitute Products or Services

• Positive implication: By making the overall industry more efficient, the

Internet can expand the size of the market.

• Negative implication:× The proliferation of Internet approaches creates new

substitution threats.

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Barriers to Entry

• Negative implications:× A flood of new entrants has come into many

industries× Internet applications are difficult to keep proprietary

from new entrants× Reduce barriers to entry such as the need for a sales

force, access to channels, and physical assets

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Bargaining Power of Suppliers

• Negative implications:× The Internet provides a channel for suppliers to reach

end users, reducing the leverage of intervening companies

× Reduced barriers to entry and the proliferation of competitors downstream shifts power to suppliers…

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Rivalry among Existing Competitors

• Negative implications:× Migrates competition to price× Lower variable cost relative to fixed cost, increasing

pressures for price discounting× Reduces differences among competitors as offerings

are difficult to keep proprietary

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Bargaining Power of Buyers

• Positive implication: Eliminates powerful channels Improves bargaining power over traditional channels

• Negative implications:× Shifts bargaining power to end consumers× Reduces switching costs

Case: automobile retailingEbay’s auction biz

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Key Points

The Internet’s Influence on Industry Structure

• The Internet powerfully influences industry structure.• Industry structure drives from the basic five forces of

competition.• The internet can affect these forces through many

ways.- It’s an open system whose technological advances

level most industries’ playing fields-thus intensifying competitive rivalry and reducing entry barriers.

- It dramatically increases available information, shifting bargaining power to buyers.

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How can the Internet be used to create economic value?

Industry StructureSustainable Competitive Advantage




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The Internet and Competitive Advantage

How do individual companies to set themselves apart from the pack and to be more profitable

than the average performer?

• Through achieving a sustainable competitive advantage Operate at a lower COST Command a premium PRICE Do both!

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The Internet and Competitive Advantage

• The advantages of COST and PRICE can be achieved in two ways.

Operational Effectiveness

• Do the same things as your competitors do but do better

• Better technologies, superior inputs, a more effective management structure...

Strategic Positioning

• Do things different from competitors• Deliver a unique type of value to

customers• A different array of services, or

different logistical arrangements

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The Internet affects Operational Effectiveness and Strategic Positioningin different ways.


• The Internet is a powerful tool for enhancing operational effectiveness.- Ease and speed the exchange of real-time

information- Improve the entire value chain

• Yet simply improving operational effectiveness does not provide a competitive advantage.

• To sustain operational advantages, Strategic Positioning becomes extremely important-to gain a cost advantage or price premium by competing in a distinctive way.

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1Right Goal

2Value Proposition

3Distinctive Value Chain

4Trade-Offs

5Fit

6Continuity

It MUST start with the right goal:SUPERIOR LONG-TERM RETURN ON INVESTMENT

A strategy must enable it to deliver a value proposition, or set of benefits different from the rest offers.

Strategy needs to be reflected in a distinctive value chain.The way a company conduct manufacturing, logistics…must be configured.Not simply adopt the best practices

A company must abandon or forgo some product features, services or activities in order to be unique at others.

Strategy defines how all the elements of what a company does fit together. Fit makes a strategy harder to imitate.

Strategy involves continuity of direction.

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Key Points

The Internet’s Influence on Sustainable Competitive Advantage

• Sustainable competitive advantage comes from operational effectiveness or strategic positioning.

• Most companies define Internet competition in terms of operational effectiveness. But because competitors can easily copy a firm’s advances in these areas, strategic positioning becomes most important.

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The Internet and the Value Chain

How to understand the influence of information technology on companies?

The value chainThe set of activities through which a product or services is created and delivered to customers

• The value chain is a framework for identifying all these activities and analyzing how they affect both a company’s costs and the value delivered to buyers.

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Prominent Applications of the Internet in the Value Chain

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The Internet and the Value Chain

• Because every activity involves the creation, processing, and communication of information, information technology has a pervasive influence on the value chain.

• The special advantage of the Internet is the ability to link one activity with others and make real-time data created in one activity widely available, both within the company and with outside suppliers, channels, and customers.

How to understand the influence of information technology on companies?

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The Internet as

Complement?

Is the Internet cannibalistic?Will it replace all conventional ways of doing business and overturn traditional advantages? • Some real trade-offs can exist between Internet and

traditional activities.• But modest in most industries.

Case: Walgreens and W.W.Grainger

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The Internet as

Complement

The Internet makes it easier to maintain strategic positioning.

How?

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The Internet as Complement

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Conclusion

► Strategies matter and still matter.►The Internet makes strategies more vital than ever.

►It’s all about how to use the Internet and traditional methods to achieve the greatest strategic advantage.

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Smart, Connected Products, Competition and StrategyPart II The Current Wave of Information Technology

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CONTENTS ► What is Smart, Connected Product?

► What is the effect of smart, connected products on industry structure?

► What are the new strategic choices facing companies?

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What is Smart, Connected Product?

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https://www.youtube.com/watch?v=E_BbAcBAqnQ

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What is Smart, Connected Product?

Smart, Connected Products are• Not just products that are composed only of

mechanical and electrical parts• SYSTEMS that combine hardware, sensors,

data storage, microprocessors, software, and CONNECTIVITY

• More new functionality• Greater reliability• Higher product utilization• Higher capabilities that cut across and

transcend traditional product boundaries

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What are the core elements of smart, connected products?

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1 2 3

Smart Components

Physical Components

Connectivity Components


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Physical Components

• Physical components comprise the product’s mechanical and electrical parts.

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Smart Components

• Smart components comprise the sensors, microprocessors, data storage, controls, software and an embedded operating system and enhanced user interface.

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• Connectivity components comprise the ports, antennae, and protocols enabling wired or wireless connections with the product.


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• Connectivity takes three forms. One-to-one One-to-many Many-to-many

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The changing nature of products leads to the changing value chains!

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The changing nature of products leads to the changing value chains.

What does it mean?The NEW types of products

Alter industry structure and the nature of competition

Bring NEW competitive opportunities and NEW threats

Reshape industry boundaries Create entirely NEW industries

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Reshaping Industry Structure

► How do smart, connected products reshape structure?

► What’s the effects of smart, connected products on industry competition and profitability?

► Use Porter’s Five Force Model to examine their impact on industry structure

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An Overview ofPorter Five Forces Analysis

A framework to analyze the level of competition within an industry and

business strategy development

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Bargaining Power of Buyers

• The smart, connected products can increase buyer power by giving buyers a better understanding of true product performance, allowing them to play one manufacturer off another.

• Buyers may also find that having access to product usage data can decrease their reliance on the manufacturer for advice and support.

• “Product as a service” business models or product-sharing services can increase buyers’ power by reducing the cost of switching to a new manufacturer.

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Rivalry among Competitors

• The expansion of capabilities in smart, connected products can tempt companies to get into a feature and function arms race with rivals.

• Rivalry among competitors can increase as smart, connected products become part of broader product systems.

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Threat of New Entrants

• High fixed costs of more-complex product design, embedded technology, and multiple layers of new IT infrastructure

• Broadening product definitions can raise barriers to entrants even higher

• Increase buyer loyalty and switching costs, further raising barriers to entry

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Threat of Substitutes

• Create new types of substitution threats, such as wider product capabilities that subsume conventional products

• New business models enabled by smart, connected products can create a substitute for product ownership, reducing overall demand for a product

• Offer superior performance, customization, and customer value relative to traditional substitute products

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Bargaining Power of Suppliers

• Software reduces the need for physical tailoring and the hence the number of physical component varieties

• Smart, connected products often introduce new suppliers that manufacturers have never needed before: providers of sensors, software, connectivity, embedded operating systems, and data storage…

• New suppliers of the technology stack for smart, connected products also gain greater leverage given their relationships with end users and access to product usage data.

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New Industry Boundaries and System of Systems

Blurry Industry Boundaries and Diminishing Role of Firm Smart, connected products does not only reshape competition

within an industry, but also expand the definition of the industry.

The competitive boundaries of an industry has been widened as a set of related products that together meet a broader needs. The function of one product is now optimized with other related products.

So the basis of competition shifts to the performance of the broader product systems.

This leads to that “the firm is just one actor.”

The manufacturer now can offer a package of services and equipment that optimize overall results.

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New Industry Boundaries and Systems of Systems

From Product to System of Systems

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How can companies achieve sustainable competitive advantage in a shifting industry structure?

Do a review!

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ReviewIndustry Structure

Sustainable Competitive Advantage




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Review

How do individual companies to set themselves apart from the pack and to be more profitable

than the average performer?

• Through achieving a sustainable competitive advantage Operate at a lower COST Command a premium PRICE Do both!

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Review

• The advantages of COST and PRICE can be achieved in two ways.


• Do the same things as your competitors do but do better

• Better technologies, superior inputs, a more effective management structure...

Strategic Positioning

• Do things different from competitors• Deliver a unique type of value to

customers• A different array of services, or

different logistical arrangements

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How can companies achieve sustainable competitive advantage in a shifting industry structure?

• The foundation for competitive advantage is operational effectiveness.

• Yet OE is hardly a source of sustainable competitive advantage.

• Because competitors will implement the same best practices and catch up.

• So to define a distinctive strategic positioning becomes extremely important.

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So Strategies Matter !

• Strategic positioning is all about doing things differently.

• A company must choose how it will deliver unique value to the set of customers.

• Strategy requires making trade-offs: deciding not only what to do but what not to do.

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Implications for Strategy

10 NEW Strategic Choices1. Which set of smart, connected product capabilities

and features should the company pursue?2. How much functionality should be embedded in the

product and how much in the cloud?3. Should the company pursue an open or closed

system?4. Should the company develop the full set of smart,

connected product capabilities and infrastructure internally or outsource to vendors and partners?

5. What data must the company capture, secure, and analyse to maximize the value of its offering?

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Implications for Strategy

10 NEW Strategic Choices6. How does the company manage ownership and

access rights to its product data?7. Should the company fully or partially disintermediate

distribution channels or service networks?8. Should the company change its business model?9. Should the company enter new businesses by

monetizing its product data through selling it to outside parties?

10. Should the company expand its scope?

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Q1Which set of smart, connected product capabilities and features should the company pursue?

Step 1

Step 2

Step 3

• A company should incorporate those capabilities and features that reinforce its competitive positioning.

• Decide which features will deliver real value to customers relative to their cost.

• The value of features or capabilities will vary by market segment, and so the election of features a company offers will depend on what segments it choose to serve!

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Q2How much functionality should be embedded in the product and how much in the cloud?

Answer:• A company must decide whether the enabling technology

for each feature should be embedded in the product raising the cost of every product delivered through the product cloud, or both.

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Q3Should the company pursue an open or closed system?

Open System

Closed System

An open system enables the end customer to assemble the parts of the solution-both the products involved and the platform that ties the system together-from different companies.

A closed system aims to have customers purchase the entire smart. It creates competitive advantage by allowing company to control and optimize of system.

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Q4Should the company develop the full set of smart, connected product capabilities and infrastructure?

Answer:• It depend. A company must choose which layers of

technology to develop and maintain in-house and which to outsource to suppliers and partners.

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Q5What data must the company capture, secure, and analyse to maximize the value of its offering?

A company must consider:

• How does each type of data create tangible value for functionality?

• For efficiency in the value chain? • Will the data help the company understand and

improve how the broader product system is performing over time?...

• ALSO the product integrity, security or privacy risks for each type of data and the associated cost

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Q6How does the company manage ownership and access rights to its product data?

The key is who actually owns the data.

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Q7Should the company fully or partially disintermediate distribution channels or service networks?

By minimizing the role of the middlemen, companies can potentially capture new

revenue and boost margins. They can also improve their knowledge of customer needs,

strengthen brand awareness, and boost loyalty by educating customers more

directly about product value.

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Q8Should the company change its business model?

It depends on• The costs of servicing the product and

other costs of use• The risks of downtime and other product

failures and defects not covered by warranties

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Q9Should the company enter new businesses by monetizing its product data through selling it to outside parties?

Only if it may lead to new services or new business.

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Q10Should the company expand its scope?

Companies must identify a clear value proposition before entering.

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Key Points

Smart, connected products enable four new categories of

capabilities that create breakthroughs in differentiation and

operational effectiveness, improve customer experience, and

enable new revenue streams.

To capitalize, manufacturing firms must rethink nearly

everything they do—from how products are designed, and

sourced, to how they are manufactured, sold and serviced, to

putting in place a whole new kind of IT infrastructure.

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Strategy and The InternetCUHK Business School Greta Zhang