Strategic Role of IS

IT for Competitive Advantage

Based on the Strategy and Technology, Netflix and Zara

Chapters in:
http://gallaugher.com/book
 Issues Covered:
• Basics of strategy & competitive advantage
– Operational Effectiveness
– Strategic Positioning
– Characteristics of assets that may yield competitive
advantage
• Key Resources for Competitive Advantage
• Industry/Competitive Analysis (5 forces)
• Value Chain
ICA: Industry & Competitive Analysis
(Porter’s Five Forces)

Potential
new entrants

Power of Rivalry among Power of

suppliers existing competitors buyers

Threat of substitute
.
products or services
 Understanding Competitive
Advantage:
Operational Effectiveness vs.
Strategic Positioning
“Why reinvent the wheel if someone has already come up with
an easy-to-use, useful, and elegant solution? When designing
the Netflix website, we turned to the best:

- Netflix co-founder Jim Cook

“Why reinvent the wheel if someone has already come up with
an easy-to-use, useful, and elegant solution? When designing
the Netflix website, we turned to the best: Amazon. Some of the
ideas that we adapted [included]: Product and button
placements; Overall color schemes; Size of DVD images for fast
page loading; Customer reviews and movie reviewer articles;
Easy-to-use search with categorized searching by movie genre;
Overall Web site navigation.”
- Netflix co-founder Jim Cook
 Technology Alone Won’t Give You
Competitive Advantage
• Operational Effectiveness –
performing the same tasks better than
your rivals.

• Design
• Customer Service
• Technology
• Quality
• All are critical, but not enough...
Winning Strategy is about
Sustainable Differences...
 Assets for Competitive
Advantage:
So What Does it Take to Win?
 How Do We Know if Assets Yield
Sustainable Advantage?
• Rareness
– Is the asset in limited supply or
difficult to acquire?
• Value
– Does the asset yield value to the
firm/customers?
• Imperfectly Imitable
– Is the asset impossible to imitate?
• Non-Substitutable
– Is the asset without comparable
substitutes?
Key Resources for
Competitive Advantage
– Imitation-resistant Value Chain
– Brand
– Scale
– Differentiation
– Data & Switching Costs
– Network Effects
– Distribution Channels
– Patents
Gamechangers: Netflix Case Study
 Key Resources for Comp. Adv.

• Brand
• Scale
– Distribution Centers
– Customers
– Selection
• Data / Switching Costs
Fighting Back
• Exclusives
• From “Long Tail” to
“Long Enough Tail”
– “We are actively curating
our service rather than
carrying as many titles as
we can”
• Scale exists here, too
– more customers
– more content
 More Fighting Back...
• Original content
– Critically acclaimed, culturally resonant
• Data’s “Big” Role
– Better data than DVD-by-mail
– Content Acquisition
• costs, popularity
– Site design (UI)
• A/B Testing “I
“I can
can justify
justify the
the spend
spend with
with our
our
– Mass-customization data
data and
and dodo so
so with
with aa far
far greater
greater
• Promoting titles via pages and custom- degree
degree of
of confidence
confidence thanthan the
the
targeted ads
– Creative
television
television networks”
networks”
• Casting decisions
• An Attractive Partner “The
“The goal
goal isis to
to become
become HBO
HBO
– Non-linear, binge watching & multi- faster
faster than
than HBO
HBO can can become
become
screen works for customers & content us”
creators
us”
-- Netflix
Netflix Content
Content Chief
Chief
Ted
Ted Sandros
Sandros
Value Chain
Infrastructure: general mgmt, planning, finance, IS
HRM: recruiting, hiring, training, and development
Tech. Development: R&D
Procurement

Inbound Outbound Marketing

Operations Service
logistics logistics & sales

Straddling: When a firm adopts more than one method of

doing business (occupies more than one position) yet fails to gain the
full advantages of any of these efforts.
Ex: weak copycat efforts (e.g. Gristedes v. FreshDirect)
“I
“I would
would love
love to
to organize
organize our
our business
business
like
like Inditex,
Inditex, but
but II would
would have
have to
to knock
knock
the
the company
company downdown andand rebuild
rebuild itit from
from
scratch.”
scratch.”
-- Gap
Gap exec.
exec. quoted
quoted in
in The
The Economist
Economist
 Why Study Zara?
• To understand and appreciate :
– The counterintuitive and successful strategy of Zara
– The technology, which has made all of this possible
–– Vertically
VerticallyIntegrated
Integrated
idea
ideato
tostore
storeinin22wks,
wks,12x
12xfaster
faster
Deliveries
Deliveries22times
times//week
week
–– Many
ManySKUs
SKUs(30,000
(30,000vs.
vs.2,000-4,000)
2,000-4,000)
–– Small
SmallRuns
Runs==exclusivity
exclusivity
–– Loyalty
Loyalty(visits:
(visits:17x/yr
17x/yrvs.
vs.3x/yr.)
3x/yr.)
–– 1/12th
1/12th(or
(oreven
evenless)
less)avg.
avg.advertising
advertisingspend
spend
–– Fewer
Fewermark
markdowns
downs//sales
sales
–– 50%
50%markdown
markdownratio
ratiovs.
vs.85%
85%ofofZara
Zara
inventory
inventorysold
soldat
atfull
fullprice
price
–– Lower
Lowerwrite-offs
write-offs
–– 17%-20%
17%-20%ind.ind.avg.
avg.vs.vs.about
about1%
1%at
atZara
Zara
 Attributes Competitors Zara
New Items Designed 2,000~4,000 (H&M,Gap) 30,000
From concepts to 3~5 months (H&M), 6 months 15 days
products (Gap) , 9 months (others)
Manufacturing No factory (H&M) 60% produced in house
Batch size Hugh batch size “everything Small batches “You’ll never
is the same” (Gap) end up looking like someone
else.”
average markdown ratio approximately 50% 15% (85% full price)
# of store visit per year 3 17
Marketing /Revenue ratio 3.5% 0.3%
Failed product 10% 1%
introductions
gross margins 37.5% 56.8%
IT Investment ¼ of the industry average
Stores 3,076 stores WW with 2,551 in 3,900 stores across 70
US (Gap) countries.
Production Planning

2-20
“I
“I would
would love
love to
to organize
organize our
our business
business
like
like Inditex,
Inditex, but
but II would
would have
have to
to knock
knock
the
the company
company downdown andand rebuild
rebuild itit from
from
scratch.”
scratch.”
-- Gap
Gap exec.
exec. quoted
quoted in
in The
The Economist
Economist
The Role of Timing & Technology:
Think Beyond Platitudes
It’s Not About the Technology...
(that’s cheap or free!)
Early Movers Who Failed...
Early Mover Later Entrant
Big Followers Who Failed...
Big Follower Startup Incumbent
Timing & Technology
• It’s not the technology or the timing, it’s what
you do with a technology & timing lead.
• Create assets that are valuable, rare,
imperfectly imitable & non-substitutable and
you’ve got terrain that can be defended.

Vs.

• Stay customer-focused, innovate, & don’t lose your edge,

or you’re Yahoo! or worse, Friendster!