E-commerce Strategic Analysis

1. E-commerce Strategic Analysis Jifeng Luo Antai College of Management, SJTU luojf@sjtu.edu.cn

2. Strategic Analysis • What is strategy? • Industry Structure • Dynamic Competitive Advantage • Value Chain and Competitive Model • Strategy and Organization

3. What is Strategy? Performance: Profitability is most common • Total profit vs. Profit rate • Short term vs. Long term • Shareholders value External Context: Industry characteristics plus social, political and regulatory environment Internal Context: Resources and Organization, Decide your focus Strategy: • Understanding of the key relationships among actions, context and performance • A guide for managers to take actions consistent with this understanding

4. What is Strategy? Context External (industry, economy) + Internal (resources & organization) Performance Market share, profits, brands, innovation, reputation, employee satisfaction, social goals Actions Acquire resources, Redesign processes, Organization change • Tangible resources: facilities, labs, infrastructure and money • Intangible resources: product designs, brands, relationships • Human resources: employee skills, managerial competence

5. I.Goals: where? Elements of Strategy IV.Logic: why? II.Scope: what? III.Competitive Advantage: how? Having a strategy requires a strong focus on profitability (goals), an ability to define a unique value proposition (how and why), and a willingness to make tough trade-offs in choosing what not to do.

6. Elements of Strategy • Goals: Dominate market, Technology leader, … • Why important to have goals? • Scope: Products, Markets, Activities? • What’s NOT included? • Competitive Advantage: Cost, Differentiation, … • How are you better? • Logic: Lo cost  Lo Price  Dominance  Scale economy Lo cost • Dot-com’s nemesis

7. Strategic Analysis • What is strategy? • Industry Structure • Dynamic Competitive Advantage • Value Chain and Competitive Model • Strategy and Organization

8. 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

9. Elements of Industry Structure (Porter) New entrants Threat of entrants Industry Competitors Intensity of rivalry Bargaining power of suppliers Bargaining power of buyers Suppliers Buyers Threat of substitutes Substitutes

10. Entry Barriers Determinants • Economies of scale • Proprietary product differences • Brand identity • Switching costs • Capital requirements • Access to distribution • Proprietary learning curve • Access to necessary inputs • Government policy • Absolute cost advantages • Expected retaliation

11. Rivalry Determinants • Industry growth • Intermittent overcapacity • Product differences • Brand identity • Switching costs • Concentration and balance • Informational complexity • Diversity of competitors • Corporate stakes • Exit barriers Game

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

14. Determinants of Buyer Power

15. Determinants of Suppliers Power • Differentiation of inputs • Switching costs of suppliers and firms in the industry • Presence of substitute inputs • Supplier concentration • Importance of volume to supplier • Cost relative to total purchases in the industry • Impact of inputs on cost or differentiation • Threat of forward integration relative to threat of backward integration by firms in the industry

16. 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?

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

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

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

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

22. Intensified Competitive Dynamics Due to IT

23. Intensified Competitive Dynamics Due to IT

24. Intensified Competitive Dynamics Due to IT McAfee and Brynjolfsson 2008

25. IT-Enabled Processes • IT are accelerating competition, • Not because more products are becoming digital • But because more processes are • A company’s unique business processes can now be propagated with much higher fidelity across the organization by embedding it in enterprise information technology • IT helps the process changes stick • It also allowed for quick and easy propagation of the new process in all sites

26. Strategic Analysis • What is strategy? • Industry Structure • Dynamic Competitive Advantage • Value Chain and Competitive Model • Strategy and Organization

27. Competitive Advantage • Is there a universal key to competitive advantage? • Positional advantage (e.g., dominant industry position) • Capability based advantage (e.g., superior quality) • Capabilities and position may interact

28. Positional Advantage • Brand name (Coke, Mercedes) • Customer relationships (Nordstrom) • Government protection (Developing economies) • Distribution channel (P&G can get shelf space) • Geographic incumbency (Wal-Mart in small towns) • Installed base (Windows) • Infomediaries (AOL, Yahoo!)

29. Capability Based Advantage • Firms differ in capabilities. (Thru organizational learning) • Manufacturing capability (Miniaturize consumer electronics) • Time to market (Japanese auto-makers) • Organizational capability (Resources, processes, values) • Distinct capabilities (Are you better than rivals?)

30. Is my advantage from position or capability? • Does it matter? • May affect defense • How did AT&T defend its monopolistic position until 1984? • How would Sony defend its manufacturing capability? • Capabilities may lead to a position that deepens capabilities • What is Boeing’s advantage for? • Position in a duopoly market? Or, • Capability to manage large-scale projects?

31. Sustainable Advantage? Sustainable advantage resists competition Position: 1. Defend your position (Windows in O/S market) 2. Will position change hands? (IBM compatible to Wintel) Capability: 1. Improve continuously (through learning) 2. Better if it’s hard to understand and imitate (complexity of structures, routines, culture make it hard to codify and capture)

32. Competitive Advantage is Dynamic! • Exploiters: Deepen present competitive advantage (e.g., reduce costs, improve product performance), • And, • Explorers: Develop new form of competitive advantage (e.g., develop new products and markets)! • Pure explorers develop new competitive advantage • Pure exploiters reinforce current advantage • Many combine these two approaches!

33. Explorers versus Exploiters

34. 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 OfficeMax stores. In general, Apple has been hit by the downturn in the personal computer market. At the time Apple entered the off-line 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?

35. Strategic Analysis • What is strategy? • Industry Structure • Dynamic Competitive Advantage • Value Chain and Competitive Model • Strategy and Organization

36. The Value Chain Corporateinfrastructure Human resource management Support activities Information Technologydevelopment Procurement Inbound logistics Operations Primary activities Outbound logistics Marketing and sales Service Margin Information • How do we create value for customers? • Primary activities directly create value • Support activities help create value • Value added = output value – input value

37. Five Primary Activities

38. Four Support Activities

40. The Value Chain for New Social Media Corporateinfrastructure Human resource management Support activities Information Technologydevelopment Operations: IT infrastructure Procurement Primary activities Marketing and sales Service Margin Information • Procurement: attract new users, let users (both new and loyal) generate contents, so to lure more users • Operations: create/maintain a platform that can let users to do what they want to do

41. 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?

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

43. Strategic Analysis • What is strategy? • Industry Structure • Dynamic Competitive Advantage • Value Chain and Competitive Model • Strategy and Organization

44. Incentive Problem Organization Design Problems Coordination Problem 1. Incentive Problem: Induce people with divergent private goals to work toward the same goal Information asymmetry, moral hazard, and monitoring costs 2. Coordination Problem: What are the work flows? Who makes what decisions? How is information shared? Do we promote specialization or team-based environment?

45. Organization is a necessary condition of advantage (Organization design is dictated by the strategy; no BEST design) Architecture Industry environment Strategy Organization Design Routines Culture Organizational elements must be consistent with one another, and align with strategy and industry environment.

46. Elements of Architecture • 1. Organizational structure deals primarily with coordination • Divide people into sub-units and define linkages between them • Functional versus Divisional structure • Flat versus Tall hierarchy • Horizontal linkages (personal network, liaisons, task-forces) • 2. Compensation and rewards deal with incentive problems • Indicators related to profitability • Benchmarking to “net out” external effects • Multiple indicators may help. Why? • Cost of monitoring limits number of indicators

47. Functional Versus Divisional Structure CEO Sr. Mgr. Sr. Mgr. Legal Finance HR Marketing R&D Mfg. • Single industry firm: Specialization; Career development. CEO Div 1 Div 2 Fin. HR Mfg. Fin. HR Mfg. • Multiple product lines or countries: Coordination within division.

48. Other Structures • Matrix: Dual or triple authority structure. An employee may report to a country head and a business sector head. In Shell, a manager would report to Managing Director of Shell France and Head of Shell Refining sector. • Typically one command structure dominates. • Leads to much complexity! • Project: Fixed functional departments plus temporary project teams in construction, oil exploration, …

49. Routines & Culture • Routines: Establish common expectations and a protocol for cooperation between parties in the performance of a process (coordination gains) • What decision making rules (e.g., majority, consensus, seniority) exist? • What routines exist for resource allocation, information sharing, coordination within and between subunits? • Culture: Commonly held values and beliefs • How strong? Does it support cooperation? • Does it improve goal congruence and thus reduce need for financial incentives?

50. Strategic Alignment Organization must support strategy! STRATEGY: Competitive Advantage Refine / Deepen: Exploiter Discover new ways: Explorer Coordination Issues Incentive Issues Culture Routines Architecture