Strategic Analysis Value Chain Competitive Model Industry Structure

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

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 Office. Max stores. In general, Apple has been hit by the downturn in the personal computer market. At the time Apple entered the offline 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

Corporate infrastructure Human resource management Support activities Technology development Procurement Inbound Operations Outbound Marketing Service logistics and sales Primary activities The Value Chain Margin

Four Support Activities Description Corporate infrastructure General management Human resource management Technology development Hiring, training, & development. Improving product / process Procurement Function or purchasing input. Internet Application

Five Primary Activities Primary Activity Description Inbound logistics Receive, store, and distribute. Operations Transform inputs into products. Outbound logistics Marketing and sales Store & distribute products. Promotion and sales force. Service Customer service Internet Application

Airline Industry Value Chain FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT Financial Accounting Policy Flight, route and yield analyst training Regulatory Legal Community Compliance Affairs Baggage Handling Training Pilot Training Safety Training Computer Reservation System, In-flight System, Flight Scheduling System, Yield Management System Agent Training Product Development Market Research In-flight Training Baggage Tracking System Information Technology Communications PROCUREMENT • Ticket Counter • Route Selection • Passenger Service Operations • Gate Operations System • Yield Management • Aircraft System (Pricing) Operations • On-board Service • Fuel • Flight Scheduling • Baggage Handling • Crew Scheduling • Ticket Offices • Facilities Planning • Aircraft Acquisition INBOUND LOGISTICS OPERATIONS • Baggage System • Flight Connections • Rental Car and Hotel Reservation System OUTBOUND LOGISTICS • Promotion • Advertising • Advantage Program • Travel Agent Programs • Group Sales • Lost Baggage Service • Complaint Follow-up MARKETING SERVICE AND SALES

Support activities Information The Value Chain Corporate infrastructure Human resource management Technology development Procurement Primary Inbound Operations Outbound Marketing Service activities logistics and sales Margin Information Pre-Internet: Materials flow paramount With Internet: Information flow equally important

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

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

Entry Barriers üEconomies of scale üProprietary product differences üBrand identity üSwitching costs üCapital requirements üAccess to distribution üAbsolute cost advantages üProprietary learning curve üAccess to necessary inputs üGovernment policy üExpected retaliation

Rivalry Determinants q. Industry growth q. Fixed (or storage) cost/Value added q. Intermittent overcapacity q. Product differences q. Brand identity q. Switching costs q. Concentration and balance q. Informational complexity q. Diversity of competitors q. Corporate stakes q. Exit barriers

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

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 ØDifferentiation of inputs ØSwitching costs of suppliers and firms in the industry ØPresence of substitute inputs ØSupplier concentration ØImportance of volume to supplier ØCost relative to total purchases in the industry ØImpact of inputs on cost or differentiation ØThreat of forward integration relative to threat of backward integration by firms in the industry

Impact of Competitive Forces Potential Uses of IT to Force Implication Combat Force Threat of new entrants New capacity Substantial resources Reduced prices or inflation of incumbent’s costs Provide entry barriers: Economies of scale Switching costs Product differentiation Access to distribution channels Buyers’ bargaining power Prices forced down High quality More services Competition encouraged Buyer selection Switching costs Differentiation Entry barriers Suppliers’ bargaining power Prices raised Reduced quality and services (labor) Supplier Selection Threat of backward integration Threat of substitute products or services Potential returns limited Ceiling on prices Improve price/performance Redefine products and services Traditional intraindustry rivals Competition: Price Product Distribution and service Cost-effectiveness Market access Differentiation: 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 • Foreign General Merchandisers or Discounters • Established Retailer Shifting Strategy to Discounting or Megastores Threat of Entrants Bargaining Power of Suppliers • U. S. Product Manufacturers • Foreign Manufacturers • I/T Suppliers • Mail Order • Buying Clubs Intra-Industry Rivals: Kmart, Sears, Specialty Stores Threat of Substitutes Bargaining Power of Buyers • Consumers in Small Town U. S. A. • Consumers in Metropolitans Areas in the U. S. • Telemarketing • Door-to-door Sales

Industry Structure: After Wal-Mart • Foreign General Merchandisers or Discounters • Established Retailer Shifting Strategy to Discounting or Megastores Threat of Entrants Intra-Industry Rivalry Bargaining Power of Suppliers • U. S. Product Manufacturers • Foreign Manufacturers • I/T Suppliers Rivals: Kmart, Target, Sears, Toys R Us, Specialty Stores Threat of Substitutes • Mail Order • Home Shopping Network • Electronic Shopping Bargaining Power of Buyers • Consumers in Small Town U. S. A. • Consumers in Metropolitans Areas in the U. S. • Telemarketing • Buying Clubs • Door-to-door Sales

Channel Facilitator vs. Channel Competitor Seller Original Intermediary Buyer Seller Channel Facilitator: autobytel. com Original Intermediary Buyer Channel Competitor: Southwest

How does the Internet alter industry structure? • Buyer Power • Supplier Power • Threat of New Entrants • Threat of Substitutes • Rivalry

Industry Sales The Industry Life Cycle Emergence Growth Maturity Decline Time

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 – B 2 C & B 2 B

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

External Forces Affecting Competition Technology Changing Social Values Buyers Economic Changes Substitutes Competitive Rivalry from Existing Firms New Entrants Regulatory Environment Suppliers Demographic Changes

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?

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

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

Strategic Option Generator TARGET SUPPLIER CUSTOMER COMPETITOR THRUST DIFFERENTIATION COST INNOVATION GROWTH ALLIANCE MODE OFFENSIVE DEFENSIVE COOPERATIVE DIRECTION INTERNAL EXECUTION COMPETITIVE ADVANTAGE Source - Wiseman: Strategy and Computers: Information Systems as Strategic Weapons, Richard D. Irwin.

Federal Express: Absolutely Positively Overnight TARGET SUPPLIER CUSTOMER COMPETITOR THRUST DIFFERENTIATION COST INNOVATION GROWTH ALLIANCE MODE DEFENSIVE OFFENSIVE COOPERATIVE DIRECTION INTERNAL EXECUTION COMPETITIVE ADVANTAGE Source - Wiseman: Strategy and Computers: Information Systems as Strategic Weapons, Richard D. Irwin.

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

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

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?