IT Infrastructure Chapters 5 & 6

Chapters 5-6 IT InfrastructureChapters 5 & 6 INFO 410 Glenn Booker Images are from the text author’s slides 1 INFO 410 Chapters 5-6

Five competitive forces • Before diving into the second module, we’ll examine the five competitive forces that shape strategy (case study 1-1) • Technology can influence or drive all of them • Our overall goal is to be profitable (yay capitalism!) • The most obvious competitive force is your competitors in the industry • Most don’t look beyond that Chapters 5-6

Five competitive forces • Customers can play you against your rivals, lowering prices • Suppliers can limit your profits by charging high prices • Threat of new rivals can increase capacity, and increase the investment needed to play • Substitute products can steal customers Chapters 5-6

The big picture • So we need to consider all five major forces in a given industry to produce a good strategy • A common approach is to position yourself where forces are weakest • Paccar sells custom trucks to owner-operators • MP3s created a substitute for buying music CDs; Apple filled the void with iTunes Chapters 5-6

Tricks to win • Limit supplier power via standardized parts • Expand services so it’s harder for customers to leave • Invest in products different from your rivals, to avoid price wars • Invest in R&D to scare off new rivals • Make products very available, to offset subs Chapters 5-6

Strength of forces drives profit • When competitive forces are all strong (airlines, textiles) there is little profit • Conversely, weak competition leads to high profits (soda, software, toiletries) • Profitability, measured by ROIC (return on invested capital) is typically 10-20% • Airlines and mail order about 5% • Soda and software are over 35% Chapters 5-6

Strength of forces drives profit • Short term profits are affected by many things (weather, industry cycles) but long term performance is dominated by these five forces • The strongest competitive force(s) determines how profitable an industry can be • Hence it/they are key factors in choosing the best strategy Chapters 5-6

Threat of new rivals • New players add capacity to produce products, and pressure to lower prices • Especially if they are established firms in other areas • Pepsi  bottled water • Microsoft  Web browsers • Apple  music distribution Chapters 5-6

Threat of new rivals • To avoid this threat, existing producers must hold down prices, and/or invest in new products to keep customers loyal (Starbucks) • Notice it’s the threat of rivals, not actual new rivals, that limits profitability • Barriers to entry help keep out new competition Chapters 5-6

Barriers to entry • Supply-side economies of scale • It’s cheaper to make lots of stuff than a little • Every aspect of the value chain, even marketing and research, benefit from large scale operations • Demand-side benefits of scale • Larger companies attract more customers • “No one ever got fired for buying IBM” • eBay has more auctions, so more people use it Chapters 5-6

Barriers to entry • Customer switching costs • Changing vendors may mean changing product specs, retraining staff, adapting processes, etc. • ERP systems have huge switching costs! • Capital requirements • Make it expensive to compete with you • Facility costs, provide credit to customers, inventory costs, start-up costs, ads, R&D, etc. Chapters 5-6

Barriers to entry • Incumbent advantages • Not just for politicians! • May have cost or quality advantages over rivals, proprietary technology, best sources, best locations, known brand identity • Counter by placing self away from rivals (Wal-Mart) • Unequal access to distribution channels • Limited shelf space, available distributors Chapters 5-6

Barriers to entry • Government policies • Government can limit or forbid new entrants in an industry (e.g. radio, liquor, taxi, airlines) • Government can also encourage new entrants – subsidies, grants, 8(a) programs, etc. • Of course, new entrants in a field could expect retaliation Chapters 5-6

Barriers to entry - retaliation • Retaliation is likely, if incumbent players • Have squashed rivals before • Have lots of money • Can cut prices to drive you out of business • Or if industry growth is slow Chapters 5-6

Power of suppliers • Key suppliers can simply charge more for their products, reducing your profitability • This can include suppliers of labor! • Microsoft reduces profitability of PCs by OS costs Chapters 5-6

Power of suppliers • Suppliers are powerful if • They are more concentrated than the industry they supply (1 Microsoft vs. many PC makers) • The supplier doesn’t depend on one industry for revenue • If you only have one customer, you have to take better care of them! • There are high switching costs to another supplier • Training, location, etc. could contribute Chapters 5-6

Power of suppliers • Or if • Supplier offers unique products (or at least different, such as drug products) • There is no substitute for the supplier (airline pilots) • The supplier could enter the market themselves (Shuttle selling barebones computers) Chapters 5-6

Power of buyers • Customers (buyers) can force down prices, demand better quality or service, reducing your profitability through price reductions • Buyer power is similar for consumers and B2B customers • Consumer needs may be harder to pin down Chapters 5-6

Power of buyers • Buyers have power if • There are few of them, and/or they purchase in large volume • The latter especially if the industry has high fixed costs (telecom, chemicals, oil drilling) • Products are standardized (paper clips) • Switching costs are low • The buyers can integrate backward, and make the product themselves (packaging for sodas) Chapters 5-6

Power of buyers • Buyers are price sensitive if • The products are a major fraction of its budget (mortgages) • Buyers earn little profit, or have little cash, or otherwise need to cut purchasing costs • Buyer’s product quality is little affected by the items bought (opposite of movie cameras) • Product has little effect on buyer’s other costs Chapters 5-6

Power of buyers • Intermediate customers (distribution or assembly channels) also gain power when they influence customers’ buying decisions • Consumer electronics or jewelry retailers, or agriculture equipment distributors • Producers may avoid this through direct channels to consumers, or exclusive distribution channels (sweeteners, DuPont Stainmaster, bike parts) Chapters 5-6

Threat of substitutes • A substitute does the same function as a product in a different manner • Videoconference instead of traveling • Email instead of snail mail • Software for travel agents, when people shop online instead • Only have a cell phone instead of wired phones Chapters 5-6

Threat of substitutes • Because substitutes may be very different products, they’re easy to overlook • Used vs new products, or do-it-yourself vs. purchased could also be factors • High threat of substitutes lowers profitability • Industries often need to distance themselves from well known substitutes Chapters 5-6

Threat of substitutes • Threat of substitutes is high if • There is good price-performance compared to the industry product (Skype vs long distance calls, Netflix vs YouTube) • Switching cost to substitute is low (generic drugs) • Hence need to monitor other industries for new substitutes (e.g. plastic for car parts instead of metal) Chapters 5-6

Competitive rivalry • Rivalry among competitors in an industry is very familiar • Sales, new products, ad campaigns, service improvements • Rivalry limits profitability • Rivalry has dimensions of intensity and the basis upon which it depends Chapters 5-6

Competitive rivalry • Intensity of rivalry is high when • There are many competitors, or they are the same size & power • Industry growth is slow, makes for fight over market share • Exit barriers are high, hence stuck in industry • Rivals are striving for leadership • Rivals can’t read each others’ strategies well Chapters 5-6

Competitive rivalry • Rivalry is worst for profits when it’s on the basis of price alone • Price rivalry is common when • Products or services can’t be told apart • Fixed costs are high • Capacity need to grow in leaps to be efficient • Product is perishable! (produce, or hotel rooms) Chapters 5-6

Competitive rivalry • Competitive rivalry can have other basis • Features, support, delivery speed, brand image • These are less likely to affect price, since they help differentiate products • If you compete on the same basis as your rivals, might be fighting over the same customers; instead of winning new ones via differentiation, a positive sum game Chapters 5-6

Other factors • The five competitive forces are key to developing a good strategy • But there are other factors to consider • Industry growth rate • Technology and innovation • Government • Complementary products and services Chapters 5-6

Industry growth rate • Fast-growing industries often have little rivalry, but gives suppliers a lot of power • Low barriers to entry will guarantee a lot of competitors • PCs have been very low in profit for that reason • Substitutes might still exist Chapters 5-6

Technology and innovation • Technology alone will rarely make an industry attractive • New technology attracts a lot of interest, and hence rivals • Low tech, price insensitive industries are often the most profitable Chapters 5-6

Government • Government involvement could be good or bad • Look at how they affect the five forces • Patents create barriers to entry, for example • Unions often raise supplier power • Lenient bankruptcy rules favor excess capacity and more rivalry • Consider different levels of government too Chapters 5-6

Complementary products • Some product go well together, like hardware and software! • Complements can affect demand for a product; see how they affect the five forces • Can affect barriers to entry (app development), threat of substitutes (hydrogen cars, iTunes), rivalry (pro or con) Chapters 5-6

Changes over time • Everything so far has been at one moment in time; now consider how these factors can change over time • New entries can arise from a patent expiring • Limited retail freezer space can limit new products • Large scale retailers create barriers for small competitors Chapters 5-6

Changes over time • Consolidation of appliance retailers have limited the power of their suppliers • Travel agents have little power over their commissions, due to online sales • Technology often shifts price/performance (microwaves) or creates new substitutes (flash drives instead of small hard drives) Chapters 5-6

Changes over time • Rivalries often intensify over time, as industry growth slows • Rivals become more alike as products become similar, consumer taste settles down • Some areas avoid this, e.g. casino catering to different populations • Mergers, acquisitions, and technology can alter rivalries, create customer backlash Chapters 5-6

Strategy implications • All of these forces and factors should play into creating a good business strategy • Where do you stand relative to buyers, suppliers, new entrants, rivals, and substitutes? • What changes in these forces can be anticipated? • Can you change the industry structure? • Your strategy should defend against the strong forces, and exploit the weak ones Chapters 5-6

Positioning the company • Also consider the entry and unpopular exit options – is this a good time to enter or leave a market? Or industry? • Are there changes in the industry of which you can take advantage? • Often such changes can create prime opportunities, if you can spot them Chapters 5-6

Reshape industry structure • This can be done by redividing profitability; changing the forces which affect the current industry’s profitability • Find which forces are key limits on profits, and do something to release them! Chapters 5-6

Reshape industry structure • Or expand the profit pool; increase overall demand for the products • Find new buyers • Make channels become more competitive • Coordinate with suppliers • Improve quality standards, etc. Chapters 5-6

Play in the right sandbox • Make sure you have clear industry boundaries • Sounds basic, but each industry typically needs its own strategy • Identify product or services scope, and geographic scope of each industry • Huge mistakes can result otherwise! • Miss major markets, product needs, etc. Chapters 5-6

Competition and value • The five forces (and lesser factors) identify how competition will affect a business strategy • Key is not only to identify competitive threats, but also possible opportunities • Also helps investors understand a business • Separate short term blips from structural changes Chapters 5-6

The Business of IT Understanding IT infrastructure Chapters 5-6

IT a key capability • IT is now a critical part of how businesses realize their business models • This module is about how IT affects management of a business, affects availability and security, makes new service models possible, and supports project management Chapters 5-6

IT infrastructure • Cheap computing and universal networks have formed the foundation for levels of information sharing and services never possible before • The challenges its implementation introduces can be huge, however • Reliability, interoperability with legacy systems • Reduced ability to differentiate from competition Chapters 5-6

Infrastructure constraints • Dangers include basing your infrastructure on a technology which dies • Business needs and technology decisions need to be interwoven • That’s where IS people are critical interfaces! • So what drives technology changes? Chapters 5-6

Moore’s “Law” • Gordon Moore (later cofounder of Intel) noted in 1965 that computer chip prices stayed about the same, but their speed doubled every 18-24 months • Still true today! • The 60’s and 70’s saw centralized computer architecture • Mainframes, punch cards, ttys, dumb terminals Chapters 5-6

Computer evolution • The “computer on a chip” concept started roughly in 1971 with the Intel 4004 CPU, leading to the 8088, 286/386/486/Pentium, PII, PIII, P4, etc. • With the introduction of PCs in 1981, computing started to spread from the mainframes throughout an organization • Spreadsheets, databases, CAD, programming Chapters 5-6

Computer evolution • Then the baby computers started talking to each other – the LAN was born • Led to the client/server architecture • Let the PCs do some of the work! • And the world saw the Internet explode in the early 90’s • WANs, internetworking technologies, open standards, and of course WWW Chapters 5-6

Computer evolution • Robert Metcalfe’s Law: “The usefulness of a network increases with the square of the number of users connected to the network” • Metcalfe created Ethernet, founded 3Com • Network capacity grew even faster than Moore’s Law, with cheap powerful CPUs and easy TCP/IP networks • Led to changes in computing infrastructure Chapters 5-6

IT Infrastructure Chapters 5 & 6