Lecture-4

Elements of strategic management

Thepul GinigeThepul Ginige

Elements of Strategic Management

• Role of IT• Innovation• Competitive intelligence

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Competitive Intelligence

• Internet• Competitive strategy and sustainable

advantage

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Porter’s Competitive Forces Model

• One of the most well-known frameworks for analyzing competitiveness is Porter’s competitive forces model.

• The company must confront five competitive forces.

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Porter’s Competitive Forces Model

• The five major forces can be generalized as follows:

1. The bargaining power of customers2. The bargaining power of suppliers3. The threat of substitute products and services4. The challenge from competitors within the

industry5. The threat of new entrants to firm’s market

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KodakFilm and film

processing

Substitute products:-Digital imaging-Digital photos-Photo-quality

- Digital printers

Competitors:Canon, Fuji Photo Film

and Nikon

Bargaining power of suppliers:U.S. film/camera component/imaging materials

manufacturersForeign film/camera component manufacturers

Bargaining power of customers:Consumers in small town, USA

Consumers in metropolitan areas in USA

Canadian and Mexican consumersOther foreign consumers

Eg: PORTER’S MODEL FOR KODAK

Potential new entrants:Foreign and US film

and cameramanufacturers

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Porter’s Competitive Forces Model (cont’d)

• Competitive strategies:1. Cost leadership strategy: Producing

products/services at the lowest cost in the industry. Ex: Wal-Mart.

2. Differentiation strategy: Distinguish the products and services from those of its competitors. Ex: Apple.

3. Innovation strategy: Finding new ways of doing business. Ex: Amazon.com.

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Competitive strategies (cont’d):

4. Growth strategies: Managing regional and global business expansion. Ex: Wal-Mart.

5. Alliances: Working with business partners. Ex: Drugstore.com (online pharmacy) and General Nutrition Centers (GNC) (distributor of vitamins and health foods) formed a partnership that gave Drugstore.com the exclusive rights to sell GNC-branded products.

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Examples of businesses defending themselves against the five competitive forces:

• Via the Internet and other telecommunication networks, Fedex offers self-tracking of packages, thereby reducing the chance of new companies entering the overnight delivery business.

• Automobile manufacturers use computerized quality-control systems to make steel producers (the suppliers) more aware of quality and reduce their bargaining power.

• J.C. Penny uses an information system which allows its male customers to select fabric, cut and size at J.C. Penny store and obtain a custom-made suit in a week, thus reducing the customer’s bargaining power.

• Many computer companies provide their customers with free software and other computer services, thus reducing the customer’s bargaining power.

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Domino’s Pizza’s Competitive Strategy

1. Customer dials a special number

2. The calls are received at the AT&T Store Locator Service Node.

3. Using an automotive number identification system, the Store Locator finds the address of the caller. The computer then matches the caller’s address with the nearest open Domino’s Pizza restaurant.

4. Dials the restaurant.5. An employee at the restaurant picks upthe phone, talks with the customer, and arranges the delivery.

6. Delivery

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Use of Porter’s Model

• List players• Analyze business drivers• develop a strategy• Investigate supportive information

technologies

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Value Chain Model • According to Porter’s Value chain model, the activities

conducted in any manufacturing organizations can be divided into two parts:

– Primary activities – Support activities.

• This model highlights the primary or support activities that add a margin of value to a firm’s products and services where IT can best be applied to achieve a competitive advantage.

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Value Chain Model• Primary activities are most directly related to

the production and distribution of the firm’s products and services that create value for the customer. There are five primary activities.

• Support activities support the primary above five activities. There are four supportive activities.

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Porter’s Value Chain Analysis Model - Primary Activities

• Inbound logistics• Operations• Outbound logistics• Marketing / sales• Service

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• Inbound logistics – These are all the processes related to receiving, storing, and distributing inputs internally. Your supplier relationships are a key factor in creating value here.

• Operations – These are the transformation activities that change inputs into outputs that are sold to customers. Here, your operational systems create value.

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• Outbound logistics – These activities deliver your product or service to your customer. These are things like collection, storage, and distribution systems, and they may be internal or external to your organization.

• Marketing and sales – These are the processes you use to persuade clients to purchase from you instead of your competitors. The benefits you offer, and how well you communicate them, are sources of value here.

• Service – These are the activities related to maintaining the value of your product or service to your customers, once it's been purchased.

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Porter’s Value Chain Analysis Model - Support Activities

• Procurement• Human resource management• Technology department• Administrative Coordination and Support

Services (Firm infrastructure)

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• Procurement (purchasing) – This is what the organization does to get the resources it needs to operate. This includes finding vendors and negotiating best prices.

• Human resource management – This is how well a company recruits, hires, trains, motivates, rewards, and retains its workers. People are a significant source of value, so businesses can create a clear advantage with good HR practices.

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• Technological development – These activities relate to managing and processing information, as well as protecting a company's knowledge base. Minimizing information technology costs, staying current with technological advances, and maintaining technical excellence are sources of value creation.

• Firm Infrastructure – These are a company's support systems, and the functions that allow it to maintain daily operations. Accounting, legal, administrative, and general management are examples of

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The value chain of a firm

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Managerial Issues

• Implementing strategic information systems can be risky

• Strategic information systems require planning• Sustaining competitive advantage is challenging• Ethical issues

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ERP – Why do they Fail?

1.Is it needed ? (Integration vs. Standardization)2.Ineffective Stakeholder Management and

Change Management3.Bad data (GIGO)4.No clear objective/ destination5.Lack of a proper Project Plan/ Management

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ERP – Why do they Fail? Contd..

6.Customization7.Under-estimating the resource requirement8.Inadequate Internal resources9.Insufficient testing10.Insufficient Training and Education

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Using IT for Strategic Advantage• IT can be used

- to build a customer focused business- to reengineer business processes- to improve quality- to become an agile company- to form a virtual company- To build a knowledge-creating company

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Customer focused business• Develop a focus on the customer

– Customer value• Best value• Understand customer preferences• Track market trends• Supply products, services, & information anytime, anywhere• Tailored customer service

• Think how do you use IT to build a customer-focused business in your organization?

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Reengineering the processes

• Business Process Reengineering (BPR)– Rethinking & redesign of business processes– Combines innovation and process improvement– There are risks involved.

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Filling out a paper

loan application

A mortgage applicant

BEFORE REENGINEERING

Entering the application

into its computer system

Bank Specialists

Accessing the application

individuallyclosing

approved

AFTER REENGINEERING

Entering the Mortgagee

application intoLaptop computers

Loan originators

Checking theApplication transaction

Software

Accessing the applicationelectronically

together, as a team

Specialists

17 DAYS

2 DAYS

closing

approved

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Improving quality• Total Quality Management (TQM)

– Quality from customer’s perspective– Meeting or exceeding customer expectations– Commitment to:

• Higher quality• Quicker response• Greater flexibility• Lower cost

• IT can help firms to achieve quality goals by helping them simplify products or processes, make improvements based on customer demands, reduce cycle time and increase the quality of design and production.

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Agile company• Old businesses: Low cost, low price, mass production,

economy of scale.• New businesses: Global competition, sophisticated customers,

customized production.• An agile companies are fast moving, flexible and robust firm

capable of offering customized production, product variety, bring products based on rapid response to unexpected challenges, events, and opportunities to market rapidly and cost effectively.

Ex: Dell Computers is an agile competitor.• It heavily depends on IT. Ex: Flexible Manufacturing Systems

(FMS) help companies become an agile competitor.• A business can use IT to become an agile company.

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Virtual company• IT makes the virtual corporation possible.

• A virtual company is an organization that uses IT to link people, assets, and ideas to create and distribute products and services without being limited to physical locations or traditional boundaries.

Ex: JetBlue Airways Corporation ,commonly called jetBlue, is an American low-cost airline.

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Virtual company

• Major attributes of VC:• Each partner brings its core competency so an-

all star winning team is created.• No single company can match what the VC

can achieve. • Resources of the business partners can be put

to use more profitably. • It is difficult to identify the boundaries of a

VC.

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Building a Knowledge-creating company• Knowledge management enable companies to learn

faster than their competitors giving them a sustainable competitive advantage.

• The goal of knowledge management systems is to help organizations create, organize and make available important business knowledge whenever and wherever it’s needed in an organization.

• KMSs collect all relevant knowledge and experience in the firm and make it available whenever and wherever it is needed to support management decisions and business processes.

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What is Knowledge?

• Personalized information• State of knowing and understanding• An object to be stored and manipulated• A process of applying expertise• A condition of access to information• Potential to influence action

Sources of Knowledge of an Organization

• Intranet• Data warehouses and knowledge repositories• Decision support tools• Groupware for supporting collaboration• Networks of knowledge workers• Internal expertise

Definition of KMS

• A knowledge management system comprises a range of practices used in an organization to identify, create, represent, distribute, and enable adoption to insight and experience. Such insights and experience comprise knowledge, either embodied in individual or embedded in organizational processes and practices.

Purpose of KMS• Improved performance • Competitive advantage • Innovation • Sharing of knowledge • Integration • Continuous improvement by:

– Driving strategy– Starting new lines of business– Solving problems faster– Developing professional skills– Recruit and retain talent