Video Transcript: Business Strategy and Information Technology

Welcome. We're going to discuss business strategy and information technology  strategy and information systems. We'll begin with industry structure. We'll  discuss the five competing forces in the industry. Structure, the competitive  strategy, value chain analysis, business process design, re engineering and  information systems. First, let's discuss business strategies. The job of the  strategist is to understand and cope with competition. So we need to understand the components of the market, understand our competitors, what their strengths  and weaknesses are, what our opportunities and threats are, and take  advantage of that. Competition for profits goes beyond established industry  rivals to include four other competitive forces, customers, suppliers, potential  entrance and substituted products. The extended rivalry that results from all five  forces defines an industry structure and shapes the nature of competitive  interaction with an industry. So the extended rivalry that results from all five of  these forces, right is going to define the industry structure and landscape. So all  of these things are going to define the market, and we need to create a business strategy that will put us in the best position to compete and maximize our profit  potential. Industry structure and forces. Forces are intense, airlines, textiles and  hotels, almost no competition or company earns attractive returns on investment here. There is a lot of overhead that goes into these industries, particularly  airlines, hotels, textiles, a lot of labor, a lot of inputs, raw material costs. So that's why competition in these areas are so intense. There's not a lot of differentiation  between them, and there's a lot of fixed costs associated forces are benign,  software, soft drinks, toiletries, many companies are profitable, so, so there's a  whole lot of software, there's a whole lot of soft drinks. There's a whole lot of  these things, right? And it seems benign, but people are going to use these right very frequently, very often. So there are many competitors in this space, and  despite the fact of the competition, many are still profitable because so many  people use these regular items industry structure manifested in the competitive  forces sets industry profitability and competitiveness in the medium and long  run. So our structure is going to come about through the competitive forces in  the market, and they're going to drive us to create our structure. Industry  structure affects a firm strategic positioning. So depending on where the industry is, how it's comprised, who controls what, what the supply and demand, knowing these things in an industry and how to position effectively will let you become  more competitive and more strategic in your thinking, identify the strongest  competitive forces, or force for strategy formulation, five forces that shape the  industry, competition, number one, threat of a new entrant. So time and cost of  entry is a component of this threat. Specialist knowledge we need to economies  of scale, cost advantages, technology protection, barriers to entry, right? So  whenever we're in a market, we're competing in this market, and it's being and  it's very successful, and companies are profitable, we're always going to have  the threat of new entrants into the market, people wanting to come in and 

capture market share and drive down some of our revenues. So we have to be  aware of the threats of new entry and be ahead of the competition, competitive  rivalry, number of competitors, quality differences, other differences, switching  

costs, customer loyalty. So when you're competing in an industry, obviously  you're going to compete against other companies, and you're competing for  those consumers dollars, so you want to maintain an advantage over them,  buying power, number of customers, size of each order, differences between  

competitors, price sensitivity, ability to substitute cost of changing so buying  power, we can have an advantage over the competition in the industry by having scales, economies of scale right, and buying in bulk and buying more so we can  drive our cost down. The more we're able to purchase, the more leverage we  have, the better prices we can get, therefore the greater profitability we can  assume. Threats of substitution, substitute performance, cost of change. There's always a threat of substitution. Because if I'm making JIFF peanut butter and  Peter Pan comes out over here, or if I don't want peanut butter and jelly, but I  want ham and cheese, the substitute of that sandwich is the ham and cheese  over the peanut butter and jelly. Supplier, power, number of suppliers, size of  suppliers, uniqueness of service, your ability to substitute cost of changing so  the supplier may have the power because they have limited resources. They  have a limited amount of raw materials, and a lot of companies want these raw  materials so they have more power over the buyer. The supplier has more  power over the buyer because the resources are limited. Many firms want those  resources, therefore the supplier can bid the price up and have control over the  buyers. Sources of switching costs, loyalty programs. A lot of companies offer  loyalty programs. You can think about an airline. They offer miles or points that  you can redeem. Learning costs, switching technologies may require an  investment in learning a new interface and commands, so switching technology  is going to take some time to get used to it. You're going to have to spend some  time and training and development of your staff. So there's a little bit of risk  there. When you're switching software, information and data, users may have to  re enter data, convert files or databases, or even lose earlier contributions on  incompatible systems. So there's always a risk in updating. There's always a  disk, a risk in increasing your technologies, getting better technologies are going to be a learning curve. But I think what most firms, when they increase their  technology or they innovate, they are looking more in the long term, not just so  much the short term. Here and now, they're going to fish for the long term  benefits and financial commitment. They can include investments and new  equipment, the cost to acquire any new software, consulting, your expertise, and the devaluation of any investment and prior technologies no longer use  contractual commitments. Breaking contracts can lead to compensatory  damages and harm an organization's reputation as a reliable partner. So even  though there's going to be little bit of volatility, volatility during a shift in 

technology, software uses potentially, we want to make sure that we're able to  get through those trends that transition quickly, so that we don't interrupt our  production and we don't lose any reputation to our customers, contractual  commitments. Breaking contracts can lead to competent compensatory  damages and harm an organization's reputation as a reliable partner. Search  cost, finding and evaluating a new alternative costs, time and money. The  Internet and its effect on industry structure, which we all know, the Internet has  revolutionized the way that we do business, and now we are able to do things  from a firm level that we weren't able to do before, and become more efficient,  more effective with the internet technology. So threats of substitute products or  services, right? And the internet and its effect on our industry structure. So by  making the overall industry more efficient, the internet can expand the size of  the market, which we see happening clearly. The proliferation of internet  approaches creates new substitution threats, right? So they have more  information available more quickly, so that we're able to search for substitutes  and find something, maybe at a cheaper price buyers bargaining power of  channels and eliminates powerful channels or improves bargaining power over  the traditional channels, bargaining power of end users, shifts bargaining power  to end consumers and reduces switching costs now barriers to entry reduces  the barriers to entry, such as the need for a sales force and. Access to channels  and physical assets. Anything that internet technology eliminates or makes it  easier to do reduces barriers to entry. Internet applications are difficult to keep  proprietary from new entrants. A flood of new entrants has come into many  industries because of the internet. It makes things easier, access to information,  being able to move resources quickly. Bargaining power of suppliers, due to the  internet, procurement using the internet tends to raise bargaining power over  suppliers, though it can also give suppliers access to more customers. The  internet provides a channel for suppliers to reach end users, reducing the  leverage of intervening companies. The Internet also provides procurement, and digital markets tend to give all companies equal access to suppliers and  gravitate procurement to standardized products that reduce differentiation,  reduce barriers to entry and the proliferation of competitors downstream shifts  powers to suppliers rivalry among existing competitors. So the Internet helps  reduce the differences among competitors, and it equals the playing field as  offerings are difficult to keep proprietary. If migrates, competition to price widens  the geographic market, increasing the number of competitors, lower variable  costs relative to fixed cost, increasing pressures for price discounting. So the  internet has made our industries in America and across the globe more  competitive, more efficient, more effective for consumers and for producers  suppliers. So let's look at the types of innovations, first sustaining an innovation  that does not affect existing markets, evolutionary innovation that improves a  product in the existing market in ways that customers are expecting, fuel 

injection versus carbureted, right? That was the natural evolution, revolutionary,  radical innovation that is unexpected but nevertheless does not affect exist  existing markets. Disruptive an innovation that creates a new market by applying a different set of values, which ultimately and unexpectedly overtakes an  existing market, ie the Model T Ford that changed everything and people no  longer rode horses. Now they have to. They can drive cars.