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Chapter 2 Summary

Business Competitive Environment

Review of Objectives
To clearly understand competition: Definition of Competitiveness Competitive Advantage Global Competition Role of the nation: Role of government within a nation.

Definition of Competitiveness

Objective of a business is to make a profit. Profit based on providing value to customers.

How can a business assure value to customers? A good competitor knows: Which products and services it offers. Who its customers are. Who its competitors are.

Competitive Advantage
To assure positioning for profit, a company must maintain competitive advantage. Methods that are achievable and sustainable. Work smarter. Assess whether Information Systems are appropriate to gaining a competitive advantage? Focus on three primary inputs: HR , Capital, Technology.

Global Competition
The Global Market will come to you if you dont go to it. By staying in your home country, you assume a defensive position. There are advantages and disadvantages to going global. These need to be considered carefully.

Role of the Nation


Study states that increased competitiveness of the Nation will stimulate the economy. 6 recommended steps to stay competitive. Only companies can sustain and achieve competitive advantage. Government should serve as a catalyst and a challenger.

Competitiveness: A Link to National Goals


Human Resources
Trade Policy
Decreased Budget Deficit Stronger National Security

Capital

Improved Domestic Performance

Increased World Market Competitiveness Reduced Trade Deficit

More and Better Jobs

Technology

New Competition

Increased Standard of Living


Figure 2-1

Chapter 3 Introduction
The Porter Competitive Model for Industry Structure Analysis

Key Chapter Objectives


Basic understanding of Porter Competitive Model How the model can be used to analyze a companys competitive position within its environment (its industry). How IS infrastructure can influences a companies responsiveness to its changing business environment.

The Porter Competitive Model


Used to understand and evaluate the structure of an industrys business environment and the threats of competition to a specific company.

Porter Competitive Model


Potential New Entrants

Bargaining Power of Suppliers

Intra-Industry Rivalry
Strategic Business Unit

Bargaining Power of Buyers

Substitute Products and Services


Source: Michael E. Porter Forces Governing Competition in Industry Harvard Business Review, Mar.-Apr. 1979

Figure 3-1

Two Strategic Objectives

Create effective links with customers and suppliers


Create barriers to new entrants and substitute products

Primary and Supporting Strategies


Differentiation Strategy (Primary) Low Cost Strategy (Primary) Innovation (Supporting) Growth (Supporting) Alliance (Supporting)

Value Chain

Developed by Michael Porter but different from competitive model because it focuses within the company.
Analyzes the cross-functional flow of products or services within an organization that add value to customers.

Generic Value Chain


SUPPORT ACTIVITIES FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT

INBOUND LOGISTICS

OPERATIONS OUTBOUND LOGISTICS

MARKETING AND SALES

SERVICE

PRIMARY ACTIVITIES
Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright 1985 by Michael E. Porter.

Figure 3-6

Value Chain and IS


The Value Chain can be used to determine where IS can strengthen the flow of primary and support activities within an organization. Every segment of an organization needs IT and IS to be competitive. So this model is essential to visualizing the flow of activities within segments through the use of IS and IT.

Chapter 3
Porter Competitive Model for Industry Structure Analysis

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

Competitive Strategy

Porter Competitive Model


Was not developed for IS use. Breaks an industry into logical parts, analyzes them and puts them back together. Avoids viewing the industry too narrowly. Provides an understanding of the structure of an industrys business environment. Provides an understanding of competitive threats into an industry.

Why Do You Care?


The collective strength of the industry forces determines the ultimate profit potential of an industry. The strongest competitive forces are of greatest importance in formulating competitive strategies. Every industry has an underlying structure, or a set of fundamental economic and technical characteristics that gives rise to these competitive forces.

Why Do You Care?


This view of competition pertains to industries selling products and those dealing in services.

A few characteristics are often key to the strength of each competitive force.

Key Industry Analysis Factors


Collecting the data. Determining which data is important.

Selecting an appropriate overall approach.


Deciding on the logical starting point.

Basic Objectives of the SBU


1. To create effective links with buyers and suppliers. 2. To build barriers to new entrants and substitute products.

Porter Competitive Model


Potential New Entrants

Bargaining Power of Suppliers

Intra-Industry Rivalry
Strategic Business Unit

Bargaining Power of Buyers

Substitute Products and Services


Source: Michael E. Porter Forces Governing Competition in Industry Harvard Business Review, Mar.-Apr. 1979

Figure 3-1

Rivalry Likelihood
Profit margins.

Industry growth rate and potential.


A lack of capacity to satisfy the market. Fixed costs. Competitor concentration and balance. Diversity of competitors.

Existing brand identity.


Switching costs. Exit barriers.

A Buyer Has Power If:


1. It has large, concentrated buying power that enables it to gain volume discounts and/or special terms or services. 2. What it is buying is standard or undifferentiated and there are multiple alternative sources. 3. It earns low profit margins so it has great incentive to lower its purchasing costs. 4. It has a strong potential to backward integrate.
5. The product is unimportant to the quality of the buyers products or services.

A Supplier Has Power If:


1. There is domination of supply by a few companies. 2. Its product is unique or at least differentiated. 3. It has built up switching costs. 4. It provides benefits through geographic proximity to its customers. 5. It poses a definite threat to forward integrate into

its customers business. 6. A long time working relationship provides unique capabilities.

Definitions
New Entrant:

An existing company or a startup that has not previously competed with the SBU in its geographic market. It can also be an existing company that through a shift in business strategy begins to compete with the SBU.
Substitute Product or Service:

An alternative to doing business with the SBU. This depends on the willingness of the buyers to substitute, the relative price/performance of the substitute and/or the level of the switching cost.

Possible Barriers to Entry


Economies of scale.

Strong, established cost advantages.


Strong, established brands. Proprietary product differences. Major switching costs. Limited or restrained access to distribution. Large capital expenditure requirements. Government policy. Definite strong competitor retaliation.

Substitute Threats
Buyer propensity to substitute.
Relative price/performance of substitutes. Switching costs.

Competitive Strategies
What is driving competition in my current or future industry? What are my current or future competitors likely to do and how will we respond? How can we best posture ourselves to achieve and sustain a competitive advantage?

Strategy Options
According to Michael Porter
Primary Strategies 1. Differentiation 2. Least Cost Supporting Strategies 1. Innovation 2. Growth 3. Alliance

Can Information Systems:


1. Build barriers to prevent a company from entering an industry? 2. Build in costs that would make it difficult for a customer to switch to another supplier? 3. Change the basis for competition within the industry? 4. Change the balance of power in the relationship that a company has with customers or suppliers? 5. Provide the basis for new products and services, new markets or other new business opportunities?

Parts Manufacturers Electronic Components Specialty Metal Suppliers Machine Tool Vendors Labor Unions IT Vendors

Porter Competitive Model Heavyweight Motorcycle Manufacturing Industry North American Market
Foreign Manufacturer

Potential New Entrant

Established Company Entering a New Market Segment New Startup

Bargaining Power of Suppliers


Automobiles Public Transportation Mopeds Bicycles

Intra-Industry Rivalry
SBU: Harley-Davidson
Rivals: Honda, BMW, Suzuki, Yamaha

Bargaining Power of Buyers


Recreational Cyclist Young Adults Law Enforcement Military Use Racers

Substitute Product or Service

Business Strategy Model - Motorcycle Manufacturing Industry


Product Strategy
Type/Purpose/Size

Heavyweight Off-Road Dual Purpose Road Racing Caf Racer


Price Strategy

Entry Level
Law Enforcement

Moderate Market Strategy Europe Japan/Asia Manufacturing Strategy Vendor Emphasis

Premium

Military Recreational Professional Young Adult

North American

Latin America Outsource

Vertically Integrated

Sales/Distribution Strategy Distributors


Independent

Independent Dealers Franchised Dealers Company Structure


Alliances Joint Ventures/Subsidiaries

Information Systems
Engineering Product Design Manufacturing Sales/Distribution Business

Business Strategy Model Food Service Industry Product Strategy


Limited Specialized Products Broad Range of Specialized Products Wide Range of Non-specialized Products Health Conscious Products

Customer Strategy
Young Adults Parents Teenagers with Social with Focus Kids Time Conscious Adults

Leisure Adults

Senior Citizens

Ethnic Focus

Store Format Strategy


Dine In Wait Service Dine In Counter Service or Buffet Long Term Contracts Take Out

Drive Through

Vendor Strategy
Competitive Bids

Alliances

Vertically Integrated

Market Strategy
Local Regional National International

Company Structure Strategy


Independent Alliances Franchises Subsidiary

Information Systems Strategy


Customer Systems Store Logistical Systems Product Analysis System Business Systems

Porter Competitive Model Analysis for the San Francisco 49ers


New Entrants

Suppliers

Intra-Industry Rivalry
SBU: SF Giants

Buyers

Substitute Products and Services

Porter Competitive Model Analysis for the San Francisco 49ers Bay Area Market New Entrants
Canadian Football Professional Hockey Professional Soccer Sumo Tournaments

Suppliers
Players Union City of SF Transportation Services Food Service Sovereigns Police and Sanitation Service Utilities Stadium Employees

Buyers
Die Hard 49er Fans Die Hard Football Fans Intra-Industry Rivalry Fair Weather Football Fans SBU: SF 49ers Non-football Fans Rivals: Oakland Raiders Out of Town Visitors Arena Football Opposing Team Fans S.F. 49ers Age Group Segments Golden State Warriors Groups Versus Individuals College Athletic Events Corporate Sponsors High School Athletic Events Sports Writers and Media Movies, Stage Plays, etc. Outlets General Travel and Travel Packages

Substitute Products and Services


Televised Football Games - Free or Cable Service at Home Televised Games at Sports Bars Radio Broadcasts of Football Games Rotisserie Leagues, Trading Cards, Memorabilia

Porter Competitive Model Tips


1. To incorrectly define the industry can cause major problems in doing Section I of the analysis term paper. 2. You must identify the specific market being evaluated. 3. Your analysis company is the Strategic Business Unit. 4. Identify rivals by name for majors, by category for minor rivals if needed to present the best possible profile of

rivals.

Porter Competitive Model


5. Be sure to address the power implications of both
customers and suppliers. Power buys them what? 6. Identify buyers and suppliers by categories versus companies. 7. Summarize your Porter Model analysis.

Computer Industry
Why is this industry more of a challenge to evaluate using the Porter Competitive Model?

Old Computer Industry


Layer 5 Distribution Layer 4 Application Software Layer 3 Operating System Software Layer 2 Computing Platforms Layer 1 Basic Circuitry IBM DEC HP Fujitsu NCR
Figure 3-3

The New Computer Industry


Layer 5 Distributors Computer Dealers Super Stores Mass Clubs Merchandisers Mail Order Value-add Resellers Direct Sales Force Other

Layer 4 Applications
Spreadsheets Word Processors Database

Lotus 1-2-3

Microsoft Excel

Quattro Pro

Layer 3 Operating System Software Layer 2 Computer Platforms

MS DOS
Novell Netware

Windows
Banyan

OS/2

Unix
IBM

Apple
Others

IBM

Compaq

Other Intel-Based PCs

Apple Macs

Other

Layer 1 Microprocessor

Intel X86

Motorola

RISC

Power PC

Figure 3-4

The Computer Industry


Layer 6 Sales and Distribution Layer 5 Application Software Enterprise Specific Layer 4 Database & Networking Software Layer 3 Operating System Software Layer 2 Computer Hardware Platforms Computer Stores Super Stores Mass Mail Merchandisers Order Value-add Resellers Direct Sales Force

Internet Direct

Desktop Suites Enterprise Resource Planning Supply Chain Management Other Word Processors Spread Sheets Publishing Groupware Data Warehouse Other

LAN, WAN and Internet Software Interfaces, Browsers and Search Engines Hierarchical Database Relationship Database

Windows

Unix

Linux

Apple

Supercomputer Mainframe Midrange Workstation PC

Handheld Device

Layer 1 Microprocessor

Intel X86

Motorola

RISC

Power PC

Computer Industry
Hardware Processors Input/Output Devices Storage Devices Multiple processor segments in the computer industry. Processor companies versus specialized hardware companies.

Networking Equipment?

Software

Systems Software
Operating Systems Database Systems

Hardware vendors versus independent software companies.

Network Systems
Utility Software Performance and Security Software Development Software Programming Languages CASE Software Applications Software

Applications Software
Specific application software to do numerous things. Running on a range of processors. Applications suites (integrated applications) Some call these integrated enterprise applications Is game software from Sony a part of the computer industry? Is software to run numerical control machine tools part of the computer industry? Is software to analyze automobile smog tests part of the computer industry?

Worldwide Computer Hardware Sales


2000

1999

1998

Supercomputer
1997

Mainframe Midrange Workstation Personal Computer

1996

1995

Source: Dataquest
1994

1993

Millions of Dollars 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000

Worldwide Hardware Sales


2002 2001 2000 0 100 200 300 PCs Total Hardware
Billions of $s

Billions of $s
Source: Dataquest

What is a PC?
1. A desktop toolword processor, spreadsheet, publishing tool, data store.
2. An entertainment device.

3. Communication deviceemail.
4. Information sourceInternet sources. 5. A collaboration tool.

PC Industry Segment
1. Passed $100 billion in sales in the first ten years.
2. Growth and competition was based on industry standards like never before.

3. This has spawned thousands of niche companies.


4. The PC has fundamentally restructured the Computer Industry. 5. Industry pioneers believe the revolution is no more than half over.

Change Relative to Selling PCs


1. Languages 2. Application Packages

3. Connectivity and Compatibility


4. Multimedia

5. Communication Device--Groupware

PC Industry Change
Atari Cromemco Fortune Systems Wicat Systems Kaypro Morrow Designs Osborne Computer Victor Technologies Dell Gateway IBM HP (Compaq) NEC

The Future Computer Industry


1. Traditional US Companies (large). 2. Asian Electronic Companies. 3. The New Strategy Companies. Why has the US continued to be the world leader in the computer industry?

Porter Value Chain


Basic Concept:

1. Deals with core business processes.


2. Enables tracking a new idea to create a new product and/or service from origination all the way to customer satisfaction.

Porter Value Chain


Manufacturing Industry Value Chain

Research and Development

Production Engineering and Manufacturing

Sales Marketing and Distribution

Service

Retail Industry Value Chain

Partnering with Vendor

Managing Buying Inventory

Distributing Operating Inventory Stores

Marketing and Selling

Value Chain Things to Remember


1. Value to customer objective is not clear.
2. Relay team concept is too time consuming and doesnt work in the current competitive environment.

3. Maximize the value-add activities and eliminate as


much as possible the things that do not add value. 4. Make sure that each step in the overall process (each function) does things consistent with the overall objective of value to customer.

Generic Value Chain


SUPPORT ACTIVITIES FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT

INBOUND LOGISTICS

OPERATIONS OUTBOUND LOGISTICS

MARKETING AND SALES

SERVICE

PRIMARY ACTIVITIES
Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright 1985 by Michael E. Porter.

Figure 3-6

Property and Casualty Industry Value Chain


FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT

-Financial Policy

-Regulatory Compliance
Actuary Training Actuarial Methods Investment Practices I/T Communications

- Legal

- Accounting
Claims Training Claims Procedures

Agent Training
Product Development Market Research

PROCUREMENT

Policy Rating

Underwriting Investment

Independent Agent Network Billing and Collections

Policy Sales Policy Renewal Agent Management Advertising

Claims Settlement Loss Control

INBOUND LOGISTICS

OPERATIONS

OUTBOUND LOGISTICS

MARKETING AND SALES

SERVICE

Included with permission of Michael E. Porter based on ideas in Competitive Advantage: Creating and Sustaining Superior Performance, copyright 1985 by Michael E. Porter.

Figure 3-7

Technologies in the Value Chain


FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT Information System Technology Planning and Budgeting Technology Office Technology Training Technology Motivation Research Information Technology Product Technology Computer-Aided Design Pilot Plant Technology Software Development Tools Information Systems Technology

PROCUREMENT Transportation Technology Material Handling Technology Storage and Preservation Technology Communication System Technology Testing Technology Information Technology

Information Systems Technology Communication System Technology Transportation System Technology

Basic Process Technology Materials Technology Machine Tools Technology Materials Handling Technology Packaging Technology Testing Technology I/nformation Tech.

Transportation Technology Material Handling Technology Packaging Technology Communications Technology Information Technology

Multi-Media Technology Communication Technology Information Technology

Diagnostic and Testing Technology Communications Technology Information Technology

INBOUND LOGISTICS

OPERATIONS

OUTBOUND LOGISTICS

MARKETING AND SALES

SERVICE

Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright 1985 by Michael E. Porter., p. 167.

Figure 3-8

Business Awareness Questionnaire


2. The worlds largest corporation based on annual revenue is Wal-Mart. 3. CTO Chief Technical Officer CFO Chief Financial Officer

CMO Chief Marketing Officer


CIO Chief Information Officer COO Chief Operating Officer CEO Chief Executive Officer 4. Large number of well known business success books.

5. Business Week, Fortune, Forbes, The Economist,


Harvard Business Review Information Week, Datamation, Computer World A. Larry Ellison Oracle B. Scott McNealy Sun Microsystems C. John Chambers Cisco Systems D. Carly Fiorina Hewlett-Packard E. Craig Barrett Intel Corp. F. Steve Balmer Microsoft G. Jeff Bezos Amazon.com

A. Sam Walton Wal-Mart Stores


B. Fred Smith Federal Express C. Gordon Moore Intel Corp. D. Herb Kelleher Southwest Airlines E. David Filo Yahoo! F. George Zimmer Mens Wearhouse A. Michael Porter Business Competitiveness B. Michael Hammer Process Reengineering C. W. Edwards Demming Total Quality Management D. Tom Peters Managing by Walking Around E. Warren Bennis Business Leadership

Significant Business Events During 2000:

1. Enron collapse
2. HP-Compaq merger 3. United Airlines bankruptcy 4. Survival of Amazon.com and continued success of eBay. 1. Amazon.com is definitely the standard by which eCommerce companies are compared. eBay is uniquely profitable as an Internet company. 2. NASDAQ lists more than technology companies.

3. The News, Life, Sports and Weather is a description of USA Today and not the Wall Street Journal.
4. Japan, not Germany, is the worlds second largest economy.

5. Saturn is owned by GM and not Ford.


6. Burn rate is the rate at which a startup uses up its cash position on a daily or weekly basis.

7. A balance sheet indicates assets and liabilities. The profit and loss statement indicates profit.
8. A general sentiment is that established companies with a solid brick and mortar foundation can move to the Internet with a winning approach. 9. The big three of the airline industry are American, United and Deltanot Northwest.

1. To start a new business requires: E. all of the above. 2. Of the factors in question 1, not having sufficient operating capital is the cause of most business failures.

3. Never listed as first on the Fortune Most Admired List are Cisco Systems, Intel and Wal-Mart Stores.
4. Industries that have dominated the least admired list are the Savings and Loan Industry and the Airline Industry. 5. A money source for a startup that is not realistic in most cases is commercial banks. 6. IPO stands for initial public offering. 7. Marketing is determining what to sell and sales is selling what you have.