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E-strategy

E-strategy. Rahul Aranha Kathleen Bell Quan Chen Daniel Olmos Todd Riggs. 4 th October, 2001. Agenda. Analysis of Porter’s View Tapscott’s critique of Porter’s perspective The GE Model The Yahoo Model Team E-Strategy’s Takeaways. Strategy and the Internet Michael Porter.

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E-strategy

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  1. E-strategy Rahul Aranha Kathleen Bell Quan Chen Daniel Olmos Todd Riggs 4th October, 2001

  2. Agenda • Analysis of Porter’s View • Tapscott’s critique of Porter’s perspective • The GE Model • The Yahoo Model • Team E-Strategy’s Takeaways

  3. Strategy and the Internet Michael Porter

  4. Why firms have been overvalued in the Internet era… • Valuations have been based on : • Sales • Projected reductions in cost • Share prices

  5. Porter’s Framework for analyzing market profitability • Key drivers of market profitability • Power of Buyers • Power of Suppliers • Threat of substitution • The ability to erect Barriers of Entry • Industry Rivalry

  6. Focus on low price as the main competitive advantage • The impact of the Internet this far… • Reduction in company profit margins • Fiercer rivalry • Reduction in Switching Costs

  7. If profitability is under pressure, then what can I do or how can I go around it?

  8. Sustainable competitive advantage comes from… • Operating at a lower cost • Through higher operational effectiveness • Choosing a strategic positioning • Differentiates the product or service from the rest of the pack

  9. Dotcoms have violated every precept of good strategy From the Dotcom legacy… To the new Path Forward • Maximize revenue and market • share growths • Focus on profitability • Pursue all kind of revenues • Deliver real value to customer • Offer every possible service • Make thoughtful trade-offs • Imitate rivals • Tailor value chain • All kind of partnerships and • outsourcing strategies • Maintain control over assets • and channels How can the internet be leveraged to move forward?

  10. The Net as a complement to company strategy • Internet apps demand more of traditional activities • Direct ordering applications require an adaptation in warehousing and shipping systems • Internet has systemic consequences in other areas • Flow of order requests may saturate the department handling those requests • The internet has limitations • Lack of physical assets (logistical systems, warehouses, …) • No supplier-customer contact (selling jet-engines over the Net?) • How to attract new customers in an ocean of information?

  11. The Internet is here to stay!

  12. Rethinking Strategy in a Networked World Don Tapscott

  13. The Internet • “Deep rich publicly available communication technology” • Enables a new business architecture: the business web

  14. Business Web Business Model • Suppliers Distributors Service Providers Infrastructure Providers Customers • All using Internet to transact and communicate

  15. Biz Web Partnerships • Porter: Lower barriers to entry; Companies lose control • Tapscott: Firms focus on core competencies; outsource; see performance advantages

  16. Structural Changes • Porter: Superficial changes • Communication • Tapscott: Deep structural changes • Infrastructure for wealth creation changing • Evolution: Tomorrow’s Internet will be entirely different from today’s

  17. Business Model Innovation • Porter dislikes term: murky • Focused on generating revenue • Tapscott: core architecture • Deployment of resources to create distinct value • Retain old measures; New means to create value

  18. Competitive Advantage • 1001 ways to employ the Internet • Not all equal: Some better than others • Porter: Competitive Advantages neutralized, like a light switch • WRONG • Continuum of Business transformation • New applications and technologies • Greater richness and depth

  19. Areas ripe for change/improvement • Unique Products: IBM • Operational efficiencies • Customer service and relationships

  20. Customer Empowerment • Smarter • More active • More powerful • Is this bad? • Porter: Yes; Tapscott: No • Leads to more real value

  21. Tapscott’s View of Internet “Connect every business and business function and a majority of humans on the planet”

  22. Strategy and Internet • Static v. dynamic • Optimism v. pessimism • Embrace v. eschew

  23. “Short-cycle” “Long-cycle” Capital Services ~25% of Net Income ~35% of Net Income ~40% of Net Income • Lighting • Appliances • Industrial Systems • NBC • Plastics • Aircraft Engines • Power Systems • Medical Systems • Transportation Systems • Information Services (now eXchange Services) • Consumer Services (e.g. credit cards & insurance) • Equipment Management (aircraft, trailers, railcars) • Mid-Market Financing • Specialized Financing (e.g. real estate, private equity) and Specialty Insurance (e.g. reinsurance) Overview of GE’s Businesses

  24. GE’s Early Internet Foibles • 1980s & early 1990s: GE Information Systems sells Electronic Data Interchange (EDI) networks to other large corporations • 1994: GE launches first web site, an exercise in ‘brochure-ware’ • 1995: I had to get my plant manager’s authorization to get Netscape installed on my PC • 1997-98: Joint venture launched with Microsoft (MSNBC.com); NBC launches NBCi.com and the portal Snap.com

  25. GE Gets a Wakeup Call • Christmas 1998: GE CEO Jack Welch “gets it” • January 1999: Welch launches e-Business as his fourth and last company-wide initiative • “Destroy Your Business” teams • Assigns “Stuart”-esque mentors to top 1000 managers • Destroy Your Business becomes “Grow Your Business” • 2000-2001: initiative gains more clarity with introduction of “e-Sell,” “e-Make,” and “e-Buy” approaches

  26. e-Buy e-Make e-Sell Moving purchasing transactions online Moving business processes online Moving customer relationships online • Reverse auctions & straight purchasing (GE Medical Systems) • Direct savings • Reduction in cost and errors • Collaborative design online (GE Appliances) • Online customer reports vs. paper-based (GE Fleet Services) • Online mortgage origination process (GE Mortgage Services) • Online Travel & Living processes for GE employees (Travel Center, expense reimbursement) • Online wizards to assist in the design process (GE Plastics) • Remote monitoring and related services (GE Medical Systems) • Leverage existing channel partners (GE Appliances) GE Caselets Summary

  27. GE’s Outlook on Benefits e - Sell e - Buy e - Make Online Sales Auction Savings Savings ~$19 ~$2.5 ~$13 $8 ~$1.1 ~$1.0 ~$0.6 $0.1 $0 '00 '01 '02 '00 '01 '02 '00 '01 '02 Auctions Volume (Pre Tax $ in Billions) $2.3 $10 - 11 $12 - 15

  28. Jack Welch on e-Business • “I was afraid of it, because I couldn’t type” • “I don’t think there’s been anything more important or more widespread in all my years at GE. Where does the Internet rank in priority? It’s number one, two, three, and four.” • On advantages for old-line companies: “They have the business processes. They have the fulfillment capabilities. They have the brand recognition, and they often have the technology. The disadvantages are that they’re fighting an existing model. They’ve got to break the mold.” • “Old companies thought this was Nobel Prize-type work. This is not rocket science. It’s just like breathing.”

  29. Yahoo! Success Market value $30 billion Up 2,600% since IPO (1998) Unique Visitors (Aug/2001) Yahoo!: 119,878,591 Msn: 103,187,561 AOL: 94,863,873 Lycos: 69,492,163 Yahoo MSN AOL LYCOS Excite eBay “We’ve set out to make Yahoo the only place anyone needs to go to get connected to anything.” - Tim Koogle

  30. Yahoo!’s Business Model Brokerage ModelVirtual Mall: Yahoo! Store Advertising ModelGeneralized Portal: Yahoo! Home Advertising Model  Personalized Portal: My.Yahoo The method of doing business by which a company can sustain itself. -- Michael Rappa

  31. Yahoo! Partnership and Alliance Technology Providers: Infrastructure & Content Provider providers Google HP TIBCO Net2Phone L&H Novell SAP AT&T Reuters ABCNews CNN The Wall Street Journal Barron’s YAHOO! Online Advertisement: Expertise Service Provider: Wetfeet  Career service H&R Block  Tax advisory Vertical One  Personal finance Headhunter.net Yahoo!Career SONY Ford FIFA 2002 Latin Grammy Awards

  32. e-Strategy Leads to the Success • First mover. • Strategically move from sole online directory search service to full range service. • Increase customer awareness – to build brand equity through aggressive marketing activities • Building partnership with content providers and retailers. – flexibility • Avoid ISP model – to extend the reach-ness • Adopt globalization strategy – to extend the reach-ness • Personalization – to increase customer loyalty

  33. The Fall of Yahoo! • Deteriorated market environment • Stock price crashed • Continuous revenue and profit warning • 12% Staff layoff • CEO - Tim Koogle stepped down

  34. Does Yahoo! have New Strategy? Surely, the strategy of selling advertising and also doing different types of partnerships with other content providers and retailers and such is very sound at this point . … but we will go more heavily toward the top 200 advertisers in the world. …On the other hand, we will also begin the process of some premium services and price it. -- Terry Semel

  35. What Yahoo! is doing now? • The overall strategy has not changed – “Pure online player” • Focus on traditional companies to sell Yahoo’s online space. • Build long term partnership with Sony • Strengthen its business enterprise service by allying with HP, SAP etc • Start to charge fees on premium service to internet users. • Acquired Broadcast.com and build YAHOO! Broadcast to strengthen its broadband service Yahoo! Partnerships

  36. Vertical Integration v. Partnering Vertical Integration Deals + SNAP.com + Partnering: By Nielson/eRating 2001. Aug

  37. Our view (Porter) • How should one leverage the potential of the Internet? • Who will capture the economic benefits that the Internet creates? • Will all the value end up going to customers? • Will companies be able to reap a share of it? • Are my operations processes Internet-ready? • What will be its impact on industry structure/profitability? • So what’s the firm’s true competitive advantage, and does it lead to sustained profitability?

  38. Our view (Porter) • Is the 5 Forces framework sufficient to evaluate an industry in the Internet era? • Competing on price is imperative in emerging economies • Partnerships and alliances are good • Does the Internet add more value to service businesses than product businesses which are more physical asset dependent?

  39. Our view (Tapscott) • The Internet and our use and understanding of it continues to evolve. • How measuring value? • Change is good; embrace it

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