Information technology in business and society

1. Information technology in business and society Session 4 - IT strategy and Competitiveness Sean J. taylor

2. Administrativia • Facebook Experiment participation now $10! I will email. • Office hours moved to Friday: 3:30-5:30 KMC 8-191 • Varun’s office hours on Monday: 3-5pm in 8th floor tutoring area • Assignment 1 will be handed out on Tuesday (available over the weekend) • Blackboard? • Thanks to Jasmin and Alice for Tumblr advice!

3. Learning objectives • List four key Internet-enabled strategies and provide examples for each. • Understand how IT may affect each of the five forces in Porter’s model of industry competitiveness. • Understand the difference between sustaining and disruptive innovations.

4. Lower Costs and Better products

5. Substitute information for physical assets or goods Increase the output from the same payroll Substitute information technology for labor • Information vs. parts inventory (Dell, Toyota) • Information vs. finished-goods inventory (Zara, Cisco, Walmart) • Enable employees to work faster (tax returns at H&R Block) • Expand skills of employees (Progressive) • Outsourcing to lower cost regions (Microsoft call centers) • Self Service (FedEx, Citibank, Delta) • Automation (e.g., factory automation—Ford, Toyota) How does IT lower costs?

6. Increase product quality Increase product variety and ‘fit’ Increase pre-sale and after-sale support • Create better products, enabled by IT (UPS, Progressive) • Overlay better IT-enabled service on existing products (Amazon) • Use local information about demand patterns (Zara) • Find out what your customers want and build it (Dell) • Convert uniform products into differentiated ones (Yahoo) • Pleasurable Buying Experience (Amazon’s One Click Shopping) • Expedited shipping and easy return policies (Zappos) How does IT enable better products?

7. Four Key Internet-enabled Strategies 4 Key Internet-enabled Strategies for Competitive Advantage: • Disintermediation • Mass Customization • Personalization • Global Reach

8. What it is Some effects on product costs The role of IT • Disintermediation: bypassing one or more intermediaries • Typically enables manufacturers to sell directly to consumers • Often replaces one intermediary (retailer) with another (FedEx) • Information vs. finished goods (products on retail shelves) • Information vs. physical assets (warehouses) • (IT + consumer) vs. labor • The Internet (and primarily the Web) provides an interactive direct channel of communication between firms and customers Disintermediation

9. Disintermediation • Disintermediation • Using the Internet as a delivery vehicle, intermediate players in a distribution channel can be bypassed.

10. What it is The role of IT Some effects on product value and costs • Consumers play a role in customizing their products/services • Could be a physical product (computer, clothing) or a service (personal web portal) • The Internet (and primarily the Web) provides an interactive direct channel of communication between firms and customers • IT also often plays a role in the manufacturing systems used • Increases product fit • May increase product value • Can substitute information for physical inventory • Cheaper than old-style production processes Mass Customization

11. Examples of Mass Customization

12. What it is The role of IT Some effects on product value and costs • A vendor can know enough about the customer to fashion offers that are more likely to appeal to him/her. • Content filtering: Recommends items based on their similarity to what a given person has liked in the past. • Collaborative filtering: Recommends items based on purchases made by people with similar characteristics. • Reduces customer’s “search cost” • May increase product fit and value • May reduce or may increase product costs Personalization

13. Examples of Personalization

14. Globalization • IT enables coordination of organizational activities across wider geographic areas • Can outsource activities to areas with better skills or cheaper labor • Selling in many countries yields economies of scale

15. The five competitive forces Business strategy affects the profits of an individual firm The five forces determine profitability of an industry • The higher each of these forces, the closer the industry is to ‘perfect competition’, and the lower the average profits per firm • However well a company executes its strategy, its profits are often limited by its industry’s competitiveness

16. The five competitive forces: Review The threat of entry by potential entrants (new firms) into the focal industry Barriers to Entry, or Threat of new Entrants The extent of rivalry between the existing firms in the focal industry Bargaining Power of Suppliers Bargaining Power of Buyers The bargaining power of the firms that sell inputs to the firms in the focal industry The bargaining power of the customers that buy the finished products of the firms in the focal industry Threat of Substitute Products or Services The threat of products/services that could substitute (be used instead of) the finished products made by the firms in the focal industry firm = company = organization = business = competitor Industry that you are analyzing (focal industry) Rivalry Among Existing Competitors

17. Intra-industry rivalry Some factors that increase intra-industry rivalry • Lots of firms in the industry, Slow market growth rate • High fixed costs • Competing firms offer similar products Intra-industry rivalry decreases prices Examples of how IT affects rivalry between firms • The Internet globalizes commerce, increasing # of firms. Profits: • Web-based personalization can reduce product similarity. Profits:

18. Bargaining power of buyers Some factors that increase buyer power • If the buyer purchases in large volumes (Circuit City, Sears, Walmart) • If buyers can easily switch to a competing supplier (Auto companies) • If buyers know a lot about your rival’s prices (Internet/Shopbots) • Threat of backward integration (NFL vs TV networks) When your buyers have power, you can’t raise prices Examples of how IT affects buyer power • IT-administered loyalty programs foster ‘stickiness’. Profits: • The Internet provides buyers with detailed information (Edmunds). Profits: • IT requires special skills – “lock-in”. Profits: • (Windows vs. Mac)

19. Bargaining power of suppliers When your suppliers have power, your costs are higher Some factors that increase supplier power • If there are a few large suppliers (Intel & PC manufacturers, pharmaceuticals & hospitals) • Threat of forward integration (Movie studios and theatres) • If your industry is a small part of these suppliers’ demand • If buyers find it difficult to switch from existing suppliers (Microsoft) Examples of how IT affects supplier power • Internet-based B2B markets make switching suppliers easier. Profits: • Outsourcing key processes increases supplier dependence. Profits:

20. Threat of new entrants The threat of entry lowers the prices firms can charge Some factors that decrease the threat of new entrants • Economies of scale (Large physical investments: Autos, Utilities) • High capital requirements (Advertising, R&D: Autos) • Learning/experience curves (Skilled Labor: Operating Systems, Pharma) • Brand Identity (Soft-drinks, OTC Drugs, I-Banking) • Limited access to distribution channels (Supermarket goods, clothing) • Government Policy (Utilities, television stations, cable) Examples of how IT affects ‘barriers to entry’ • ATM networks increase costs of setting up retail banking. Profits: • Internet-based channels permit direct customer access. Profits:

21. Threat of substitutes If prices in an industry rise, customers use substitutes Similar to threat of entry, but from similar products (or companies) in similar/neighboring industries rather than new firms entering your industry Examples of how IT affects the threat of substitutes • Phone-PDA convergence has all but killed PDAs, video iPods/phone threaten portable DVD players. Profits: • Continuous product improvement and differentiation keeps customers from moving to potential substitutes. Profits:

22. Discussion: Online DVD rentals Potential entrants Existing firms Threat of New Entrants Online video rentals Bargaining Power of Suppliers Bargaining Power of Buyers Rivalry Among Existing Competitors Suppliers • Buyers Threat of Substitute Products or Services Substitute products/services Who are the players?

23. Online DVD: Characterizing the 5 Forces • Some capital requirements, some economies of scale. • Access to channels not restricted. • Studio relationships a barrier. Threat of New Entrants Rivalry Among Existing Competitors HIGH • Differentiation is low. • Product is a commodity. • Prices?, Demand? Online video rentals MODERATE-HIGH Bargaining Power of Buyers Bargaining Power of Suppliers Rivalry Among Existing Competitors • Switching isn’t too hard. • Piracy is growing. • Lots of competitors. • One major supplier per film/show • Each firm needs a relationship with each supplier • There are only a few suppliers (barriers to entry are relatively high in the movie business). Threat of Substitute Products or Services MODERATE-HIGH • Attention is limited. • But movies aren’t going anywhere. • In recession people go to movies HIGH LOW

24. Video on Demand

25. The innovator’s dilemma • Sustaining innovations • improve product performance • Disruptive innovations • Result in worse performance (short-term) • Eventually surpass sustaining technologies in satisfying market demand with lower costs • cheaper, simpler, smaller, and frequently more convenient to use

26. Sustaining vs. DisruptiveInnovations

27. The Innovator’s Dilemma • Barriers to innovation make it difficult to invest in disruptive technology • Experience/learning and substantial investments mean companies are set in their ways • Established customer base to whom they are held accountable. • Customers often ask for better versions of current products rather than completely new technologies.

28. “Discovering markets for emerging technologies inherently involves failure, and most individual decision makers find it very difficult to risk backing a project that might fail because the market is not there.”-Clayton Christensen, The Innovator's Dilemma

29. Disruptive Innovations More?

30. Learning objectives • List four key Internet-enabled strategies and provide examples for each. • Understand how IT may affect each of the five forces in Porter’s model of industry competitiveness. • Understand the difference between sustaining and disruptive innovations.

31. 1. “the Innovator’s Dilemma” 2. “Race against the machine”

32. Next Class:IT Platforms • Cusumano - “The Evolution of Platform Thinking” • PC Mag “What is Cloud Computing” • NY Times “The Power of Platform at Apple”