How to hear this lecture

1. How to hear this lecture Click on the icon: to hear the narration for each slide. Partnership for Performance

2. fisher.osu.edu Fisher logo The Business Context Dr. Rajiv Ramnath Director, CETI Department of Computer Science and Engineering, College of Engineering The Ohio State University Ramnath.6@osu.edu http://www.ceti.cse.ohio-state.edu Partnership for Performance Partnership for Performance

3. Agenda • How does industry structure define business strategy? • How does an enterprise pick where to do better? • How do we translate strategy into execution? • Discussion: • Why are we doing this? What is the connection to Enterprise Software Engineering? Partnership for Performance

4. Understanding Industry Structure and Competition Porter’s 5 Forces Model

5. Interplaying Elements of Industry Structure Note: These Forces are NOT independent Partnership for Performance

6. Characterizing the 5 Forces – Buyer Power • Availability of choices: More if higher • Buyer concentration vs. firm concentration • Substitute products • Buyer volume: More if higher • E.g. Walmart • Proportion of buyer cost - price vs. total purchases, buyer profit: More if Higher • Makes buyers cost sensitive. E.g. Chips for the computer industry • Buyer switching costs: Less if higher • Degree of integration/dependence with seller • Product differences • Impact of supplied product on quality: Less if higher • Less price sensitive if impact is higher. E.g. steel on aircraft manufacturers • Availability of information to the buyer: More if Higher • E.g. Walmart • Ability to backward integrate: More if higher • And replace the supplier. E.g. Auto industry • Pull-through: More if higher • Dependence on buyer to pull the supplier’s product through • Brand identity, ability to influence decision makers: Less if higher • E.g. INTEL inside, vs. DELL Partnership for Performance

7. Characterizing the 5 Forces – Supplier Power • Buyer switching costs: More if higher • Differentiation of inputs • Lack of substitute inputs: More if fewer • E.g. Gasoline • Fragmentation of buyers: More if higher • Availability of choices • Importance of volume to supplier: Less if higher • Supplier cost relative to purchases: Less if higher • Threat of forward integration relative to backward integration: More if higher • NOTE: Labor is a supplied good too Partnership for Performance

8. Characterizing the 5 Forces – Threat of New Entrants • Economies of scale: Less if higher • Permit lower per-piece margins • Entry deterring price • Proprietary capabilities: features, components, technology, experience: Less if Higher • Capabilities should not be easily acquired • Brand identity, customer loyalties, product tailoring to customers: Less if higher • Perceived or real tailoring to customer needs • Switching costs to customers: Less if higher • Especially with integrated products • Capital requirements: Less if higher • Relationships to sources of investment • Access to distribution: More if higher • Shelf space in grocery stores, contracts with car dealerships • Government regulation: Less if higher • Certifications • Standards • Expectation of retaliation: Less if higher • Market history Partnership for Performance

9. Characterizing the 5 Forces – Threat of Substitutes • Relative price/performance/perception of substitutes: More if higher • In particular trends with respect to existing products • Buyer propensity to switch: More if higher • Buyer need for variety vs. stability • Switching costs of customers: Less if higher • Ability of firms to collectively position their products against substitutes: Less if higher Partnership for Performance

10. Characterizing the 5 Forces - Rivalry • Numerous, balanced competitors => Less competition • No clear market leader • Diversity of competitors and their motivations • No clear “rules of the game” • High strategic stakes for some • Slow industry growth • Reliance on market share for growth • High fixed or storage costs => Less competition if more • Also: Capacity augmented in large increments • High exit barriers • Especially when coupled with low entry barriers • e.g. home ownership • Lack of product differences Partnership for Performance

11. So HOW do firms compete? • For this we have to study their “value chain ” – or the internal operations of the company. Partnership for Performance

12. What is the Value Chain? Partnership for Performance

13. Value chain for a personal computer manufacturer Inbound logistics Purchase components Purchase raw materials Production R&D Engineering/product design Order components Order raw materials Manufacture products Outbound logistics Inventory management Sales & Customer Order entry marketing service Order fulfillment Information technology infrastructure Partnership for Performance

14. Each value chain process consists of sub-processes Partnership for Performance

15. How Firms Compete • Goal: Create a sustainable, defensible position within the market • Generic Strategies: • Cost • Leadership is key • Differentiation • Sustainable differentiation is key • Focus • Cost or differentiation in a target segment • Targets competitor sub-optimization • Tailor value chain to strategy • NOTE: Firms rarely risk damage to the industry structure Partnership for Performance

16. Competitive Advantage is Achieved by Optimizing the Value Chain • The value chain shapes and reflects the industry structure • The value chain shapes the organizational structure – optimize both • E.g. Apple: Close interaction between marketing and product design • Each activity in the value chain is a point of differentiation – optimize these activities • Examine and optimize steps • Examine, optimize and exploit linkages • Linkages may be across firms as well • Scope affects the value chain – optimize the scope • Segment scope • Integration scope • Geographic scope • Industry scope • Discussion: How can IT help? Partnership for Performance

17. References • How Competitive Forces Shape Strategy, Michael Porter (Electronic copy provided) • http://www.geocities.com/plarmuseau/mporter3.htm Partnership for Performance

18. Connecting Strategy to Execution The Balanced Scorecard

19. Goals of the Balanced Scorecard • Strategy has to be: • Defined based on the organization and its environment (Porter’s Model) • Translated into operational terms • Documented and communicated in an understandable manner through the organization • Executed in a unified manner through the organization • Execution must be measured and used to continuously improve the strategy, design, communication and execution, using “forward looking” metrics” • Items (2) - (5): Addressed by the Balanced Scorecard Partnership for Performance

20. Linking and Communicating Translating the Vision Feedback and Learning The Balanced Scorecard Business Planning The Strategic Management Process Partnership for Performance

21. What is the Balanced Scorecard? Partnership for Performance

22. Question: What area of the Value Chain is being targeted? Partnership for Performance

23. How to Apply the Balanced Scorecard • Align activities to a strategic goal • E.g. cost reduction vs. customer intimacy vs. new product development • Tie it to the key areas in the value chain. • Bring in “forward looking” measures rather than backward looking financial metrics • E.g. number of new leads • Include “intangible” assets in the strategy • Experience, capabilities in the organization • E.g. Nationwide’s agents • Discussion: • How is this connected to Porter’s Model? • What role can IT play in achieving this? Partnership for Performance

24. References • Using the Balanced Scorecard as a Strategic Management System, Kaplan and Norton (Electronic copy) Partnership for Performance

25. Thank you! Partnership for Performance