Lecture #5

Introduction to Strategic Approaches

SYED ABDULLAH HAYAT

AIOU FALL 2015
Learning Objectives
 Generic Competitive Strategies
 Competitive Forces model

 Competitive Strategies for competing in marketplace

 Competitive Strategies
 Competitive Forces
 Strategy and the Internet
 Strategic Planning for e-Markets
 Dot-com strategies
 Competitive or cooperative strategies
Generic Competitive Strategies
 There have been many different approaches to strategy over the last 40
years but one of the most significant influencers was the Competitive
Forces Model, which Michael Porter proposed in 1980. The most
significant factor differentiating this from other models was the emphasis
not on internal organizational factors but on external factors. Porter held
that five critical factors needed to be analyzed:
Generic Competitive Strategies
 •Industry competition
 Suppliers
 Customers
 New Entrants
 Substitutes
 For each of these, specific barriers to entry have to be found and, according
to Porter, there are then three generic strategies that can be pursued by
firms to achieve commercial success
Generic Competitive Strategies
 These three strategies are:
 Cost leadership: pursuing a position of being the lowest-cost producer
through economies of scale and benefiting from ‘experience curve’ effects
in order to build and increase market share.
 Differentiation: providing a product or service with a unique
characteristic which allows the company to charge a relatively higher price
and thus generate better margins.
 Focus or Niche: concentrating on a specific market segment.
Competitive Forces model
 used to describe the interaction of external influences -- threats and
opportunities -- that affect an organization’s strategy and ability to compete
 competitive advantage - can be achieved by enhancing the firm’s ability to
deal with customers, suppliers, substitute products and services, and new
entrants to its market
Competitive Forces model

 Objective - use this model to identify potential areas where

IT can be used to gain a competitive advantage
 Competitive Strategies for competing in
marketplace
 businesses can use four basic competitive strategies to deal with these
competitive forces:
 1. Product Differentiation
 2. Cost leadership
 3. Focused differentiation
 4. Cost Focus
Competitive Strategies

Competitive Advantage
Lower Cost Differentiation

Broad Cost
Differentiation
Target Leadership

Competitive
Scope
Narrow Cost Focused
Target Focus Differentiation
Differentiation

 competitive strategy for creating brand loyalty

 Develop products & services which are different from what
the competition offers
 superior attributes
 distinguishing features
Cost leadership

 to prevent new competitors from entering their markets,

businesses produce goods/services at lower price than
competition
 based on efficient operations
 based on effective operations
 economies of scale
Focused differentiation
 develop new market niche for specialized products or
services
 so that business can compete in target market better than its
competitors
Cost Focus
 Company serves narrow market
segment with product/service
 whichit offers at a significantly
lower cost than competitors
Competitive Forces
 Use competitive strategy to combat 5 competitive forces in marketplace
 1. threat of new competitors
 2. bargaining power of suppliers
 3. bargaining power of customers
 4. substitute products
 5. rivalry within the industry
Competitive Forces
 Use IT to enact or counteract these forces with respect to
 customers
 existing & potential competitors
 suppliers
Threat of new competitors
 Erect barriers to entry:
 use IT to slow down new firms entering market
Intensify rivalry among competitors

 Change basis of competition

 IS can perhaps change the basis of competition - help offer product/service
with new features
 e.g. delivery service allows customer to track progress of package
 you are now differentiated from competition
 no longer compete just on price basis
 Pressures from potential
substitute products
 Deliver products with better value
 identify and track a market niche with IS that you can serve
better than others
 try to prevent substitution
Bargaining power of customers
 Introduce switching costs
 cost of switching to competitor
 deters customers from switching
 e.g. due to training and contracts, travel agents unlikely to switch to different
airline reservation system
Bargaining power of suppliers
 Develop Alternatives
 use IS to maintain information on available alternative
sources of supply
Tactical Moves in Pursuing a Strategy

 Firm can use any of several tactics to change its products or

processes through use of SIS
 Internal innovation - generate new knowledge
 internal growth - economies of scale
 Mergers & acquisitions
 Strategic alliances - partnerships with other companies
Strategy and the Internet
 There are those who believe that the Internet renders formal strategy
obsolete, since the rules of competition have changed significantly. Porter
(2001) argues the exact opposite, stating that because the Internet tends to
weaken industry profitability without providing proprietary operational
advantages, it is more important than ever for organizations to distinguish
themselves through strategy. Indeed, he suggests that Internet technology
provides better opportunities for businesses to establish distinctive strategic
positionings than previous generations of IT. He suggests that the Internet
influences industry structure in the following ways:
Strategy and the Internet

 Threat of Substitutes:
 Internet can expand the size of the market by making the
overall industry more efficient
 Proliferation of Internet approaches creates new-substitute
threats
 Buyers
 Eliminates powerful channels and improves bargaining power
 Shifts bargaining power to end-consumers
 Reduces switching costs
Strategy and the Internet

 New Entrants
 Reduces barriers to entry
 Flood of new entrants
 Technological advances do not stay proprietary but are easily
copied
 Suppliers
 Gives access to more customers
 New channel without intermediaries; so reduced costs
 Equal access to all suppliers through e-procurement and new
e-markets
 Reduced barriers to entry
Strategy and the Internet
 Competitors
 Reduces differences in offerings
 Migrates competition to price
 Widens the geographic market and number of competitors
 Lowers variable costs relative to fixed costs and increases price discounting
 All of these may be viewed as positives or negatives depending on your
current position in the marketplace, your role (you could be both a buyer
and supplier) and your future strategy for the marketspace. What is an
advantage for one is also likely to be a disadvantage for or a threat to
another
Strategic Planning for e-Markets
 For many retail products, Internet-based software agents called ‘shop bots’
will search for products, compare prices, conduct transactions, and arrange
for delivery. All on instructions that consumers provide them. The resulting
price competition will transfer net benefits from many producers to
consumers, yet branding and advertising will still have roles to play in the
process. With these ‘friction-free’ developments, in which information is
shared by all market participants, significant sectors of the economy.
Strategic Planning for e-Markets
 Certain types of products will move from physical form into digital bits in
order to be transported from producer to consumer. These products will
adapt their form so they can be delivered over the Internet to reduce costs.
Software and publications have already begun this process. The next wave
is already occurring in the music industry a development that will
dramatically alter the traditional business models in that sector. At the same
time, the line between producer and consumer will blur as producers allow
consumers to participate in the process of creating the unique product
desired.
Strategic Planning for e-Markets
 Internet transactions will alter the traditional form of money, as security
and privacy solutions allow for extensive use of digital cash; shop-bots as
well as humans will begin to use ‘electronic’ wallets to complete their
purchases. To benefit from reduced transaction costs for both producers
and customers, billing for regular services will be sent and paid over the
Internet. Consumers will reduce the time and effort needed to obtain
mortgages, insurance, and credit at the same time that producers reduce the
costs of providing and servicing these products. Bank ATMs will be even
more ubiquitous, because they will be connected to the Internet via
wireless terminals. Eventually, banking and other financial services could
become dominated by software companies as the difference between
money and software disappears.
Strategic Planning for e-Markets
 Over the next several years, Internet e-commerce information technology
will be dominated by three themes:
 First, CSPs ("commerce service providers") will replace ISPs ("Internet service
providers") as an increasing number of vendors provide ‘end-to-end’ service
that enables customers to establish their version of e-business on the Internet.
This vision will span the length of the ‘transaction chain’ from front-end Web
site graphics and shopping carts all the way to back-office inventory and
shipping.
 Second, the move to implement priority service pricing protocols on the
Internet will introduce resource allocation logic that is economically sound.
This logic will differentiate between important economic transactions and
lower-priority entertainment uses of the Internet.
Strategic Planning for e-Markets
 Third, it is likely that new protocols such as XML and XSL will replace
HTML as the universal language of e-commerce on the Internet. This is
because they successfully separate the real underlying data from the format
display description. The reduction in the costs of transactions using these
new tools will likely create a tidal wave of support for quick
implementation of XML/XSL initiatives. Software vendors, hardware
vendors, banks, and bit-transport companies will all battle for turf in all
three of these newly created information technology transaction market
spaces.
Strategic Planning for e-Markets
 While the Internet offers myriad opportunities, many organizations have
suffered by leaping into the maelstrom of e-business without really
understanding what they wanted to achieve. The key is to treat e-business
strategy as a business decision, not just a technology one, and to recognize
that this does not simply require alignment with existing business strategies
but the competencies to innovate and create new business strategies. This
business decision makes a variety of demands on the organization and so
business leaders must assess their ability to take advantage of those
opportunities by evaluating the company’s leadership, governance,
knowledge building, and infrastructure capabilities. As a first step it is
generally advisable to conduct a competitive industry analysis such as a
SWOT analysis. A careful examination of the strengths and weaknesses of
the organization in the electronic marketplace can result in one of the
following decisions:
Strategic Planning for e-Markets
 Not to go for e-commerce
 To go for passive web-based advertising
 To open online stores in addition to existing stores
 To establish a separate online division within the company
 To dissolve regular business and go for cyberbusiness only
Dot-com strategies
 Venkatraman (2000) offers a strategic framework which is specifically
oriented towards start-ups but which offers a very similar set of factors,
vision, governance, resources, infrastructure and alignment as
underpinning for e-business strategic development. He posits five
questions for the new dot-com:
 What is your strategic vision for the dot-com operations?
 How will you govern the dot-com business?
 How do you allocate resources for the dot-com business?
 What is the operating infrastructure of your dot-com business?
 Is your management team aligned for the dot-com agenda?
 Competitive or cooperative strategies
 When applying any strategic framework, the organization has also to
determine whether such strategies will be competitively or cooperatively
focused. Competitive strategies can fall into one of two categories—
offensive or defensive. Offensive strategies either make a full frontal
assault (e.g., Barnes and Noble against Amazon.com) or a flanking
manoeuvre, attacking the competitor in a position of weakness. An
example of this is shown in the case of E*TRADE, who compete in
different areas with Ameritrade and My Discount Broker
 Competitive or cooperative strategies

 Defensive strategies aim to lower the possibility of a successful attack

(Porter, 1980) through raising structural barriers, most commonly by
offering lowest costs through increased economies of scale. These are
generally found in first-to-e-market operations. Examples are eBay and
Dell.
 Competitive or cooperative strategies
 Cooperative strategies are used to gain advantage within an industry by
working with other firms, typically in a strategic alliance through joint-
venture or value-chain partnership. Joint ventures frequently take the form
of a virtual corporation where a number of businesses come together to
combine their strengths and offer a single face to the market. As we noted
earlier, even cooperative strategies are likely to possess embedded
competitiveness between the players, and it will be difficult to draw the
line between the two approaches.
Review of Lecture
 Generic Competitive Strategies
 Competitive Forces model

 Competitive Strategies for competing in marketplace

 Competitive Strategies
 Competitive Forces

 Strategy and the Internet

 Strategic Planning for e-Markets

 Dot-com strategies

 Competitive or cooperative strategies

The End