Strategic Analysis

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Strategic Analysis

• Value Chain
• Competitive Model
• Industry Structure
• Strategic Option Generator

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Application Problem Apple 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 Apples decision to open retail
stores represent a strategic shift? Why or why
not? 2.      Does this move create / enhance
Apples 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?
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Porters 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

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The Value Chain
Corporate infrastructure
Human resource management
Support activities
Technology development
Procurement
Inbound logistics Primary activities
Operations
Outbound logistics
Marketing and sales
Service
Margin
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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.
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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
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Airline Industry Value Chain
FIRM INFRASTRUCTURE
Financial Accounting Policy
Regulatory Compliance
Legal Community Affairs
Flight, route and yield analyst training
HUMAN RESOURCE MANAGEMENT
Agent Training
In-flight Training
Baggage Handling Training
Pilot Training Safety Training

Product Development Market Research
Baggage Tracking System
Computer Reservation System, In-flight System,
Flight Scheduling System, Yield Management System
TECHNOLOGY DEVELOPMENT
Information Technology Communications
PROCUREMENT

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

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

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

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

• Lost Baggage Service
• Complaint Follow-up

MARKETING AND SALES
SERVICE
INBOUND LOGISTICS
OPERATIONS
OUTBOUND LOGISTICS
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The Value Chain
Corporate infrastructure
Human resource management
Information
Support activities
Technology development
Procurement
Inbound logistics
Operations
Outbound logistics
Margin
Primary activities
Marketing and sales
Service
Information
Pre-Internet Materials flow paramount With
Internet Information flow equally important
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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?

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Strategic Analysis

• Value Chain
• Competitive Model
• Industry Structure
• Strategic Option Generator

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Elements of Industry Structure
New entrants
Threat of entrants
Industry Competitors Intensity of rivalry
Bargaining power of suppliers
Bargaining power of buyers
Suppliers
Buyers
Threat of substitutes
Substitutes
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• Entry Barriers
• Economies 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

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• Rivalry Determinants
• Industry 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

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Buyer propensity to substitute
Determinants of Substitution Threat
Relative price performance of substitutes
Switching costs
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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
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• 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

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Impact of Competitive Forces
Potential Uses of IT to Combat Force
Force
Implication
Threat of new entrants Buyers bargaining
power Suppliers bargaining power Threat
of substitute products or services Traditional
intraindustry rivals
New capacity Substantial resources Reduced prices
or inflation of incumbents costs Prices forced
down High quality More services Competition
encouraged Prices raised Reduced quality and
services (labor) Potential returns
limited Ceiling on prices Competition Price
Product Distribution and service
Provide entry barriers Economies of scale
Switching costs Product differentiation
Access to distribution channels Buyer
selection Switching costs Differentiation Entry
barriers Supplier Selection Threat of backward
integration Improve price/performance Redefine
products and services Cost-effectiveness Market
access Differentiation Product / Services /
Firm
Porter and Millar
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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?

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Strategic Analysis

• Value Chain
• Competitive Model
• Industry Structure
• Strategic Option Generator

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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
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Industry Structure Before Wal-Mart

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

Threat of Entrants
Intra-Industry Rivalry Rivals Kmart, Sears,
Specialty Stores
Bargaining Power of Buyers
Bargaining Power of Suppliers

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

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

Threat of Substitutes

• Mail Order
• Buying Clubs

• Telemarketing
• Door-to-door Sales

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Industry Structure After Wal-Mart

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

Threat of Entrants
Intra-Industry Rivalry Rivals Kmart, Target,
Sears, Toys R Us, Specialty Stores
Bargaining Power of Buyers
Bargaining Power of Suppliers

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

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

Threat of Substitutes

• Mail Order
• Home Shopping Network
• Electronic Shopping

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

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Channel Facilitator vs. Channel Competitor
Seller
Seller
Channel Competitor Southwest
Original Intermediary
Original Intermediary
Channel Facilitator autobytel.com
Buyer
Buyer
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How does the Internet alter industry structure?

• Buyer Power
• Supplier Power
• Threat of New Entrants
• Threat of Substitutes
• Rivalry

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The Industry Life Cycle
IndustrySales
Emergence Growth Maturity
Decline
Time
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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

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The Industry Life Cycle Stages
Emergence 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
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External Forces Affecting Competition
Technology
Changing Social Values
Regulatory Environment
Substitutes
Competitive Rivalry from Existing Firms
Buyers
Suppliers
New Entrants
Demographic Changes
Economic Changes
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Strategic Analysis

• Value Chain
• Competitive Model
• Industry Structure
• Strategic Option Generator

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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 Cant do it all, who may join hands?

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Competitive Scope

• Segment Size of market segment
• Vertical Make vs. Buy decisions
• Geographic Parts of domestic / foreign markets
• Industry Range of related industries

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Competitive Strategy Mode

• Offensive usually takes place in an established
  competitors market
• Defensive takes place in the firms 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

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Strategic Option Generator
TARGET
CUSTOMER
COMPETITOR
SUPPLIER
THRUST
DIFFERENTIATION COST
INNOVATION GROWTH ALLIANCE
MODE
OFFENSIVE
DEFENSIVE
COOPERATIVE
DIRECTION
INTERNAL
EXTERNAL
EXECUTION
COMPETITIVE ADVANTAGE
Source - Wiseman Strategy and Computers
Information Systems as Strategic Weapons, Richard
D. Irwin.
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Federal Express Absolutely Positively Overnight
TARGET
CUSTOMER
COMPETITOR
SUPPLIER
THRUST
DIFFERENTIATION COST
INNOVATION GROWTH
ALLIANCE
MODE
OFFENSIVE
DEFENSIVE
COOPERATIVE
DIRECTION
INTERNAL
EXTERNAL
EXECUTION
COMPETITIVE ADVANTAGE
Source - Wiseman Strategy and Computers
Information Systems as Strategic Weapons, Richard
D. Irwin.
35
Risks Of Strategic Systems (Logic?)

• Change basis of competition to disadvantage
• Lower entry barrier
• Bring on litigation or regulation
• Increase power of customers or suppliers

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Classical Strategic Planning Model
Mission Vision
Environment (External)
Business Plan
Tactical Plan
Strategic Plan
Opportunities Threats
Detailed Projects Resources Headcount, Capital
and Expense Budgets
Business Unit Functional Programs Major Project
s
Goals Objectives Strategy Formulation
Enterprise (Internal)
Strengths Weaknesses
Culture / Values
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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?