What’s Happening?! Broadband Internet access has grown from 6% to 31% in three years. Jobless claims fell last week to the lowest level since Nov. 30 John Rodrigues reports that he is getting job interviews. GM reported record 4th quarter earnings. First ISMA meeting on Tuesday – Speaker is JP LeBlanc from Borland. Time and place yet to be determined. 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 don’t 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 Capital Technology Trade Policy Improved Domestic Performance New Competition Decreased Budget Deficit Increased World Market Competitiveness Reduced Trade Deficit Stronger National Security More and Better Jobs Increased Standard of Living Figure 2-1 Possible Exam Questions 1. What are some ways that governments serve as a catalyst and challenger to the competitiveness of its companies? 2. Why has competitiveness become the important topic that it is? 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 company’s 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 industry’s 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. SUPPORT ACTIVITIES Generic Value Chain 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 ATP Research 1. Value Line 2. Company web page and annual report. 3. Internet search engines: Google Ask Jeeves 4. Library reference documents 5. Jack Callon and his documents The Plan for Today • Address the Concepts of the Porter Competitive Model. • Provide some industry examples using the Competitive Model. • Address the Value Chain conceptually and with industry examples. • Revisit each of these using the Airline Industry as the example in Chapter 4. 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 industry’s business environment. • Provides an understanding of competitive threats into an industry. Two Key Questions 1. How structurally attractive is the industry? 2. What is the company’s relative position within the 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? Porter Competitive Model Heavyweight Motorcycle Manufacturing Industry North American Market • Parts Manufacturers • Electronic Components • Specialty Metal Suppliers • Machine Tool Vendors • Labor Unions • IT Vendors Bargaining Power of Suppliers • Automobiles • Public Transportation • Mopeds • Bicycles • Foreign Manufacturer Potential New Entrant Intra-Industry Rivalry SBU: Harley-Davidson Rivals: Honda, BMW, Suzuki, Yamaha Substitute Product or Service • Established Company Entering a New Market Segment • New Startup Bargaining Power of Buyers • Recreational Cyclist • Young Adults • Law Enforcement • Military Use • Racers Business Strategy Model - Motorcycle Manufacturing Industry Product Strategy Type/Purpose/Size Heavyweight Off-Road Dual Purpose Road Racing Café Racer Price Strategy Entry Level Law Enforcement Moderate Market Strategy Premium Military Recreational Professional Young Adult North American Europe Japan/Asia Manufacturing Strategy Vertically Integrated Vendor Emphasis Latin America Outsource Sales/Distribution Strategy Distributors Independent Dealers Franchised Dealers Company Structure Independent 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 Store Format Strategy Dine In Wait Service Dine In Counter Service or Buffet Take Out Drive Through Vendor Strategy Competitive Bids Long Term Contracts Alliances Vertically Integrated Market Strategy Local Regional National International Ethnic Focus 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 Substitute Products and Services Buyers Porter Competitive Model Analysis for the San Francisco 49ers Bay Area Market New Entrants •Canadian Football •Professional Hockey •Professional Soccer •Sumo Tournaments Suppliers Buyers •Players Union •City of SF •Transportation Services •Food Service •Sovereigns •Police and Sanitation Service •Utilities •Stadium Employees •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 Lotus 1-2-3 •Spreadsheets •Word Processors •Database Layer 3 Operating System Software Layer 2 Computer Platforms Layer 1 Microprocessor MS DOS Novell Netware IBM Compaq Intel X86 Microsoft Excel Windows Quattro Pro OS/2 Banyan Unix IBM Other Intel-Based PCs Motorola Apple Others Apple Macs RISC Other 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 Layer 1 Microprocessor 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 Windows Unix Relationship Database Linux Supercomputer Mainframe Midrange Workstation PC Intel X86 Motorola Apple Handheld Device RISC Power PC Computer Industry Hardware • Processors • Input/Output Devices • Storage Devices Networking Equipment? Multiple processor segments in the computer industry. Processor companies versus specialized hardware companies. Software • Systems Software • Operating Systems • Database Systems • Network Systems • Utility Software • Performance and Security Software • Development Software • Programming Languages • CASE Software • Applications Software Hardware vendors versus independent software companies. 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 1996 Personal Computer 1995 Source: Dataquest 1994 Millions of Dollars 1993 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 Worldwide Hardware Sales 2002 PCs Total Hardware 2001 Billions of $s 2000 0 100 200 300 Billions of $s Source: Dataquest What is a PC? 1. A desktop tool—word processor, spreadsheet, publishing tool, data store. 2. An entertainment device. 3. Communication device—email. 4. Information source—Internet 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 • Dell • Cromemco • Gateway • Fortune Systems • IBM • Wicat Systems • HP (Compaq) • Kaypro • NEC • Morrow Designs • Osborne Computer • Victor Technologies 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 doesn’t 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. SUPPORT ACTIVITIES Generic Value Chain 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 -Financial Policy HUMAN RESOURCE MANAGEMENT -Regulatory Compliance - Accounting Agent Training Actuary Training Actuarial Methods Investment Practices TECHNOLOGY DEVELOPMENT - Legal Product Development Market Research Claims Training Claims Procedures I/T Communications PROCUREMENT •Policy Rating • Underwriting • Investment •Independent Agent Network •Billing and Collections •Policy Sales •Policy Renewal •Agent Management •Advertising INBOUND LOGISTICS OPERATIONS OUTBOUND LOGISTICS MARKETING AND SALES •Claims Settlement •Loss Control 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 Information System Technology Planning and Budgeting Technology Office Technology FIRM INFRASTRUCTURE Training Technology Motivation Research Information Technology HUMAN RESOURCE MANAGEMENT Product Technology Computer-Aided Design Pilot Plant Technology TECHNOLOGY DEVELOPMENT Software Development Tools Information Systems Technology Information Systems Technology Communication System Technology Transportation System Technology PROCUREMENT •Transportation Technology •Material Handling Technology •Storage and Preservation Technology •Communication System Technology •Testing Technology •Information Technology INBOUND LOGISTICS •Basic Process Technology •Materials Technology •Machine Tools Technology •Materials Handling Technology •Packaging Technology •Testing Technology •I/nformation Tech. OPERATIONS •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 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 world’s 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 – Men’s 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 world’s 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 Delta—not 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.